Unicorns might be mythical creatures, but in Silicon Valley, they're alive and well. In fact, more than 120 of them are thriving in the not-so-natural habitat of overfunding, overgrowing, overpopulated area of the world -- Silicon Valley.
A "unicorn" is a startup whose valuation is $1 billion or higher. The unicorn's bigger brother, the decacorn is a startup with $10 billion valuation or higher. We live in "The Age of Unicorns" according to Fortune.
These booming businesses are the stuff of living legends -- the likes of Uber, Airbnb, SpaceX, and Snapchat. Their leaders are celebrities. Their products are ubiquitous. And their disruptive, game-changing, head-turning, industry-upsetting model is what millions of entrepreneurs aspire to.
But is unicorn status truly worthy of aspiration?
I'd suggest caution. Here's why.
1. Valuation isn't the end-all.
Let's talk about valuation. Valuation is, after all, the single reason why any startup can qualify as a unicorn.
John Collison, Stripe's co-founder, is skittish when it comes to startup valuation. Here's what he told Mashable:
"I get an involuntary twitch every single time someone refers to us using valuation as kind of a shorthand. The focus on valuations seems really misplaced. Learning a valuation doesn't really tell you much about the business and it becomes this weird scoreboard thing or ranked list."
That's precisely what the Unicorn Club has become -- a "scoreboard" and a "ranked list."
High valuation does not predict success any more than a stock picker can predict which stocks will outperform the market.
2. Unicorns get eaten.
If your goal is to be acquired someday, fine. This point might not persuade you.
But if your goal is to become the world's next global brand, viz. Facebook, Apple, or Google, take heed. Your unicorn status makes you prime prey for the existing global startups, viz. Facebook, Apple, or Google.
Once you join the billion-dollar elite startups, your name gets appended to the "Who Do We Acquire Next" memo for Facebook's board meeting, or Google's executive meetup.
- Facebook acquired WhatsApp.
- Facebook acquired Instagram.
- Facebook acquired Oculus VR.
- Google acquired Nest Labs.
- Google acquired Motorola.
- Microsoft acquired Minecraft.
- Microsoft acquired Mojang.
- Apple acquired Beats.
The existing billion dollar companies eagerly swallow the billion-dollar startups. The only people better than VCs at spotting hot startups are the companies hoping to acquire hot startups.
If you're a unicorn or on the fast track to become one, don't be surprised if "Mark Zuckerberg" appears on your caller ID.
3. $1 billion is psychological cotton candy.
A billion bucks is a lot. But why a billion? What's so special about that number besides its enormity?
The answer lies in psychology. The brain likes big, round, numbers. An investor's brain, metric-driven as it may be, is no different.
Financial psychologist Brad Klontz describes investors as if they are patients suffering from mental malady. He explains in the Wall Street Journal,
"These [big, round] numbers can have a huge influence on investor emotion and behavior. When it comes to investing, we're all just a herd of antelope, skittish and afraid."
The herd of antelopes is chasing the herd of unicorns with their VC cash. But in the wild unpredictability of the startup world, numbers can lose meaning. Besides its status a fat three-comma number, a billion dollar valuation means little else.
4. It feels "bubblicious."
The graying veterans of the dot-com era are not sanguine about the unicorns. Their gloomy prediction is that "we're in a bubble." Again.
Why are we in a bubble? "Because valuations are so high."
These sage words are from Logitech's Bracken Darrell. As a gray-hair over fifty, Darrell remembers the year 2000, Pets.com, eXcite, Boo.com, GeoCities, and Razorfish. He remembers when the dot com bubble went bust.
One can only wonder if we're headed towards a similar bubble. Someday, we might be reminiscing, "Remember Snapchat? Oh, and that company...what was it, Dropbox? Oh, yeah, Spotify -- did you ever use that?"
5. Valuation does not translate into funding.
As Fortune warned, "aggressive fundraising is no guarantee that unicorns will grow into their valuations."
Remember, a valuation is not a dollar amount. It's an estimation -- a transitory speculation of an entity's worth.
In a bullish tech market agog over the likes of Slack and Snapchat, of course the professional appraisers will aim high.
But the fact that these are big-sounding valuations should suggest caution, at least. It's true that VCs are unicorn-gazing with intensity, but at the same time, valuation does not guarantee funding. And without funding, the unicorn may not be able to mature.
6. Valuation does not predict profitability.
In the heady world of billion-dollar metrics, it can be easy to lose sight of a startup's main objective. It's not funding. It's not Fortune's List. It's not an IPO. It's not even "growth."
It's astonishing to realize that a startup whose valuation has skyrocketed beyond the billion dollar point may not be profitable, nor anywhere near it.
Some unicorns seem to forget this. Take Slack's Stewart Butterfield, for example. Butterfield asserts,
"You'd have to be in a meteors-hitting-the-Earth scenario before Slack as a business would get into trouble."
To talk likelihood, meteors-hitting-the-Earth are scientifically more probable than unicorns, so maybe Slack is correct in a sad sort of way.
Just because you've hit a magic valuation number doesn't mean that your business is bulletproof. In fact, such billion-dollar stargazing might actually keep you from seeing some of the harsher realities of business life.
The ecommerce entrant, Fab, was once hailed as a billion dollar startup, but their CEO, Jason Goldberg admits that the business is nowhere near the unicorn status it once held.
His pessimistic riff on the unicorn trend might be a touch closer to the truth than Butterfield's audacious line about meteors. Here's what Goldberg said:
"If you allow yourself to believe you're worth $1 billion after two to three years of being in business, you're going to get yourself caught up in trouble."
Time will tell.
Being a unicorn isn't all bad. You get some great press, a lot of buzz, and your face appears all over the Internet. That can be fun.
Yet unicorn status could be chimeric. I guess that's what I'm trying to say. I believe that business success and life fulfillment can be had in spades whether or not you believe in unicorns.
Do you think that unicorns are overrated or overvalued?