And how many funders, seeing that unicorns are illusions bound for failure in a market where anti trust is enforced, would invest in better and more stable start ups worth actual real-world business plans?
I think most unicorns actually have a different experience, though, in that the founders often worked on their own for less than 6 months/a year before they got some funding.
I don't have data on this but I would bet a very long lead time before getting funded is actually correlated with a worse likely outcome.
For those against -- do you really prefer that only well-connected billionaires are allowed to invest in startups, and actually capture the rapid growth?
Most unicorns (and no, they aren't all scams -- many are pretty stable, or exited successfully, a la LinkedIn, Salesforce, etc) were private until they were worth tens of billions. Any gains post-IPO are small multiples of the original investment.
The only people able to invest, and actually capture that growth, were already wildly wealthy. Do you think that's fair?
I think the real question is "does the existence of unicorns provide an incentive to the average founder?", and I'd say that question's a lot less definitive.
Sure, some founders have gotten filthy stinkin' rich off their startups, but those are lottery-ticket odds. Most founders seem to be aiming for either a self-sustaining small business or an acqui-hire, both of which are middle- to upper-middle-class career paths, but neither are by and large own-your-own-helicopter-class career paths.
Around 1% of seed-funded companies go on to become unicorns (>1B valuation).
Total market value of unicorns ~$2T (~600 unicorns). So average unicorn valuation ~3.3B USD.
Let's say you're the founder and your [ultimately diluted] share of the company is 10%. You have a 10Y runway. Your EV in startup case is 330M (10% of 3.3B) * 1% chance of success = $3.3M or $330K USD per year. This is only counting the extreme (unicorn cases) and will obviously vary with equity percentages.
Here's the article in full if you are getting paywalled.
"THE unicorn of myth can heal the sick and make poisoned water drinkable. The unicorn of the business world—the label given to privately held tech startups with a valuation of more than $1 billion—has the power to bewitch investors.
The past few years have seen money slosh towards anyone in a hoodie. As well as venture capitalists, who typically finance entrepreneurs, more conservative fund managers have also been investing in these new tech firms. Today there are 144 unicorns valued at $505 billion between them, about five times as many as three years ago. Most are unprofitable.
There are signs, however, that the spell is wearing off. Mutual funds have written down the value of their investments in several startups. Square, a payments firm, went public this month at a valuation (initially, at least) about a third lower than the headline figure from its previous fundraising. Funding rounds in Silicon Valley are happening less often and are taking longer (see article). Corrections are bound to be alarming, but this is one the technology sector should welcome.
True, at a time when America’s economy is fragile, there is a risk of a dent to confidence. Yet this is hardly the dotcom bust all over again. That was a frenzy in public markets; the unicorns are largely the preserve of richer investors who are better placed to cope with losses. Mutual funds do manage small-investors’ money, but are allocating only a slim slice of their portfolios to the unicorns. And if there is any borrowed money behind these firms, it is limited.
Indeed, a correction would deal with three big distortions brought on by surging valuations. The first is a blurring between the strong firms and the weak ones. When money is pouring in, firms with the best managers and ideas find it harder to stand out from their wobblier but well-funded rivals. A willingness to burn through cash disguises flaws in business models. The food-delivery industry, for example, is one in which firms, from DoorDash to Postmates to Caviar to Munchery, have been happy to incur big losses to acquire customers. Costs spiral for everyone; M&A activity is stifled by inflated asking-prices. When funding is harder to come by, those firms that have either used the boom to store up lots of cash, or can lay out a plausible path to profitability, will do better.
Silicon rally: How the US technology sector has changed since 1980
The second distortion lies in the desperation to attain unicorn status. High valuations in general, and the unicorn label in particular, are so coveted that founders have, in effect, been happy to hand out privileges to investors in order to bump up valuations artificially. Such agreements include giving later-stage investors priority when firms go public, by handing them extra shares if the initial public offering results in a lower valuation than before. That means less is left for the real risk-takers—the entrepreneurs, early employees and initial funders. A correction may teach startups to focus less on headline numbers, more on fundamentals.
Public, not the enemy
The third distortion is the gulf between public and private markets. The ability of private markets to sustain new firms for longer than ever means entrepreneurs have more choices when it comes to how they run their firms. That is welcome. But public markets, rulebound though they are, still do some things very well: they impose greater scrutiny, and their deeper liquidity leads to more accurate pricing. If the prospect of listing on public markets comes closer because less private capital is available, the tech unicorn ought to become more disciplined as a result. That would be a rare beast."
I don't know if calling Unicorns ($1 Billion companies) mythical is that accurate. They are rare however they are becoming more and more frequent.
Jason Calacanis was discussing this in one of his recent podcast/posts and the logic of shooting for startups with high potential/high risk does make sense.
Do you think focusing both founders and VC's on the concept of a unicorn has been good or bad for startups? I personally think it has lead to overvaluation of startups and that's a bad thing.
Many startups seem to aim for this, naturally it's difficult to put actual numbers to this, and I'm sure many pursue multiple aims in the hope one of them sticks. Since unicorns are really just describing private valuation, really it's the same as saying many aim to get stupendously wealthy. Can't put a number on that, but you can at least see it's a hope for many, though "goal" is probably making it seem like they've got actually achievable plans for it... That, at least, I'm not so convinced of.
Startups are, however, atypical from new businesses, ergo the unicorn myth, meaning we see many attempts to follow such a path that likely stands in the way of many new businesses from actually achieving the more real goals of, well, being a business, succeeding in their venture to produce whatever it is and reach their customers.
I describe it as a unicorn "myth" as it very much behaves in such a way, and is misinterpreted similarly to many myths we tell ourselves. Unicorns are rare and successful because they had the right mixture of novel business and the security of investment or buyouts. Startups purportedly are about new ways of doing business, however the reality is only a handful really explore such (e.g. if it's SaaS, it's probably not a startup), meaning the others are just regular businesses with known paths ahead (including, of course, following in the footsteps of prior startups, which really is self-refuting).
With that in mind, many of the "real" unicorns are realistically just highly valued new businesses (that got lucky and had fallbacks), as they are often not actually developing new approaches to business, whereas the mythical unicorns that startups want to be are half-baked ideas of how they'll achieve that valuation and wealth without much idea of how they do business (or that it can be fluid, matching their nebulous conception of it), just that "it'll come", especially with "growth".
There is no nominative determinism, and all that, so businesses may call themselves startups all they like, but if they follow the patterns of startups without the massive safety nets of support and circumstance many of the real unicorns had, then a failure to develop out the business proper means they do indeed suffer themselves by not appreciating 5000 paying customers and instead aim for "world domination", as it were, or acquisition (which they typically don't "survive" from, as an actual business venture). The studies have shown this really does contribute to the failure rate and instability of so-called startups, effectively due to not cutting it as businesses, far above the expected norm of new businesses...
So that pet peeve really is indicative of a much more profound issue that, indeed, seems to be a bit of an echo chamber blind spot with HN.
After all, if it ought to have worked all the time, reality would look very different from today. Just saying how many don't become unicorns (let alone the failure rate) doesn't address the dissonance from then concluding "but this time will be different". It also doesn't address the idea that you don't need to become a "unicorn", and maybe shouldn't want to either... but that's a line of thinking counter to the echo chamber, so I won't belabour it here.
There is nothing mythical about well funded startups having high valuations.
You don't stumble into one while galavanting through an enchanted forest.
You can't drink the blood of a successful SV CEO to prolong your life.
If you say "unicorn" in reference to tech startups I immediately assume you are a trendy idiot who's vocabulary doesn't extend past memes and buzzwords.
Its not an unpopular opinion, but that Juicing thing was definitely an exception, not the norm.
As to why everyone is chasing unicorns, one of my friends who's actively trying to get funding for his hardware startup sums it this way: VC's would make more from 1 unicorn than 50 other mildly successful businesses, and the other 50 businesses would probably require just as much work as the unicorn.
Its a really fucked up calculus to be sure. I'm not sure what the solution is though. How do we encourage VC's to invest in more meaningful startups?
I also am not very confident in the math from this post.
$327B - all unicorn companies
$225B - all angel investment
$???B - all A,B,C,D..n companies that don't fit into the unicorn category.
I think the potential for losses is ostensibly much larger in the proposed "worst" case scenario; That being said, I don't think it's a very plausible outcome.
reply