Pursuing Mythical Creatures

The fantasy of many intrepid first-time startup entrepreneurs is to build a unicorn. Visions of technological breakthroughs, hypergrowth, and wealth creation sing a siren song as the excitement of living the dream takes hold. Yet, let us not forget that unicorns are legendary creatures rather than something you find in every woodsy glade – and there are reasons for that!

What is a Unicorn Startup?

For the uninitiated, let us start with the definition of a unicorn. A unicorn is a privately owned startup company valued at over $1 billion.

The valuation of a startup is determined by the valuation price sophisticated investors like venture capitalists are willing to pay to invest. Valuations are based on factors including market potential, growth rate, innovation capacity, company leadership, company stage, and risks. 

Why is a $1B+ Startup Called a Unicorn?

The beautiful unicorn in stories captivates our imaginations with a blend of purity and mystical strength, generating a trail of magic and wonder. Not only is a unicorn – the beloved legendary creature that looks like a white horse with a single large, pointed, spiraling horn projecting from its forehead – incredibly valued, but they are also incredibly rare.

The connotation of goodness and rarity is why the term “unicorn” gets applied to startups with over $1 billion valuations. Statistically, such sky-high valuations are incredibly rare for a startup, with typical estimates of less than 1% (think like 0.00006%) of startups achieving unicorn status.

Why do Investors Hunt for Unicorns?

For investors who spot the makings of a unicorn startup early, getting in to go along for the ride can be incredibly lucrative – with potentially amazing multiples earned on their investment.

The hunt for potential unicorns does shape what investors seek in the startups they fund. Characteristics of unicorn potential include:

• Truly massive multi-billion dollar market potential
• Profound customer value that dominates any competition
• Deep and highly protective intellectual property and regulatory moats
• Strong network effects
• Highly scalable with minimal marginal costs
• Strong profitability potential
• And so on …

For investors, who by definition are spreading their capital across multiple startups, hunting for big wins like potential unicorns is the way to create the outsize venture returns that they seek to generate. It makes good sense when they get to screen hundreds of potential winners per year.

Of course, the downside is that 90% of startups fail—and all the stars must align for success. Being able to spot nascent unicorns is complex and high stakes. Even those who manage to achieve that exciting $1B valuation milestone can still fail spectacularly (examples: Theranos, WeWork, Solyndra, Pets.com, and so on), and most who achieve unicorn valuations do not necessarily achieve liquid exits.

Should Founders Seek to Build Unicorns?

Maybe.

Sometimes, building a unicorn can also be highly valuable for the founding team as well as investors. If you find the perfect opportunity with all the right characteristics with the right timing, are able to chart a successful path over the course of years, and ultimately score an exit (either IPO or massive M&A), you can become a successful unicorn rider! I know a small handful who have done it.

However, keep in mind that building a unicorn is incredibly hard, involves making lots of high-risk bets, and takes a great deal of luck. Those brutal success statistics exist for a reason. Not only do the vast vast vast majority of startups never become unicorns, the risks you have to take in pursuit of riding a unicorn may actually mean that your startup that could have been quite a nice successful business flames out instead.

Also, remember that raising money means splitting the future exit pie in more ways. Investors with preferences (aka preferred stockholders) get their investment paid out of company sale proceeds first, so raising more demands faster growth acceleration and finding an M&A or IPO exit big enough to pay for it. Unicorns must attract a small universe of potential acquirers or be able to engage the public markets, so that makes it challenging to ultimately turn that unicorn startup into liquid assets. 

So, if you happen upon the makings of this mythical creature and can execute on the potential, you and your investors can celebrate together!

However, you might want to consider pursuing a somewhat less risky success.

What is the Alternative?

Do I want to be part of building successful, impactful businesses? Absolutely yes!

Am I excited about pursuing potentially big, profitable businesses? Totally!

Do I believe it is possible to be successful as a startup leader and investor without only chasing unicorns? Yes.

If you decide you are not into pedal-to-the-metal unicorn hunting, that is ok. Most successful startups are not unicorns. But they can be great businesses – valuable, good returns, beneficial for customers, and so on. Such successful, but not unicorn, startups can grow into robust self-sustaining profit machines, achieve IPOs, or find an excellent M&A exit from a wider array of strategic buyers.

Instead of pursuing unicorn-style hypergrowth where you pour money into ideas and strategic bets that are not yet well-proven, you can build in a more cautious way that gives you some time to learn from customers, establish product-market fit, figure out your sales playbook, and learn as an organization how to deliver customer delight efficiently.

In fact, I think that by dialing back the risk a bit and taking the necessary steps to build, test, and execute well, you can still deliver significant value to customers, have a major impact on the world, and make excellent returns for your investors and yourself. You can seek:

• Extraordinary customer value
• Strong competitive advantages
• Operational excellence
• Capital efficiency
• Investor value

Also, by keeping the risk level and pace a bit more manageable, you can keep your total capital raised at a level that opens the doors more widely to a broader array of potential acquirers who can purchase your startup at excellent multiples that give both your investors, your team, and yourself good returns.