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As the Global Unicorn Club tops 400 members, with a total cumulative valuation of nearly $1.3 trillion, I’m reminded of the words of Mark Twain. The reason? It seems that even as our eyes tell us that the term “unicorn” — a startup valued over $1 billion — is over-hyped, commoditized and essentially diluted, our imaginations still want to perceive each unicorn as a potential black swan. We want to believe that the application of the term “unicorn” conveys superpowers even on startups with questionable value propositions.
But the recent demise of WeWork, coming on the heels of underwhelming IPOs by Uber and other ex-unicorn wonderkids, has left little room for doubt: it’s time we refocus our imaginations on what actually comprises value.
It’s time to reimagine unicorns.
Over the last decade, an abundance of both audacious thinking and venture capital brought about tremendous growth in the number of unicorns. It’s worthwhile to keep in mind that despite their size, valuations, and capitalization – we’re talking about privately-held companies that are not subject to the accountability and transparency of their public counterparts. This means that investors in unicorns are forced to make decisions based on staggeringly scanty and unverified information.
The glut of new unicorns not only commoditized the handful of actual unicorns out there, it also indefinitely extended the unicorn status of multiple companies well beyond any reasonable size or valuation. Achieving the coveted “unicorn” title became so all-consuming that even investment rounds bent themselves to the mythological beast’s will. Ilya Strebulaev, an economist from Stanford University, claims that overvaluations are so endemic that most unicorns are actually overvalued by some 60 percent.
And all this has hurt not only investors, it’s hurt unicorn companies themselves. Because once the expected value of these extended private holdings is eroded in the public eye, it’s that much harder to show a path to publicly-traded profitability. Just ask Lyft and Uber. This is how we get to a world in which, according to one economist, 84 percent of companies pursuing IPOs in 2018 had no profits. In 1980, that figure was just 10 percent.
At its core, the unicorn conundrum boils down to this: Why shouldn’t a unicorn be subject to the fundamentals that govern every other business? Should these companies not be measured by profitability and revenues? Because even once the blitzscaling is said and done, all companies have to demonstrate the ability to grow revenues and continue to evolve their business model to remain relevant, significant and impactful on the global economy.
Rarity should not be commoditized. Yes, there are innovative business models and disruptive products that together can give birth to an actual unicorn. And, yes, it’s OK to aspire to cultivate these rare creatures.
Yet engineering ever-higher valuations to enable ever-faster blitzscaling is not cultivating rarity. It is leading companies down the path to failed IPOs and naïve investors down the road to losses.
Unicorns need to be reimagined as a rare natural phenomenon produced by bold leaders who know how to create value. They need to aspire to eventually IPO their businesses, while continuing to deliver the profitable growth that allows them to grow into their valuations. They need to be able to reasonably convince alternative investors that their business has a solid foundation for revenue generation, free cash generation and earnings per share.
Just as the laws of gravity work in the universe, the laws of profit and loss need to be applied simply and consistently to unicorns: If it doesn’t make money, it’s probably a bad idea. Entrepreneurial audacity has to be backed up with actual achievement. Leaders looking to create a unicorn need to think big and see many steps into the future. Yet they also need to be held accountable for executing in the here and now. Because a unicorn that can’t show a clear path to value isn’t really a unicorn. Rather, it’s a far more common creature: a money sponge.