Unicorn Hunting - The Art of Pivoting.
Unicorns and Decacorns in the valley are rare and prized sightings, but what’s even more treasured is a unicorn in disguise as a donkey. Many investors may overlook these startups, only to realize they held value all along - all it took was a pivot.
In the VC industry, Unicorns are referred to as privately owned startups that have reached a valuation of 1 Billion and on. Decacorns are 10 Billion plus. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed stage venture capital fund based in Palo Alto, California.
Aileen Lee first introduced the term unicorn in her article, "Welcome to the Unicorn Club: Learning from Billion-Dollar Startups." where she writes about how out of all the software startups founded in the 2000s, only 0.07% of them ever reach a $1 billion valuation. She explains that these startups which reach the milestone of the $1 billion mark are so rare that finding one is as difficult as finding a mythical unicorn. Ever since then, the term Unicorn has been embedded in VC culture.
Some notable Unicorns are Airbnb, Uber, Robinhood, SpaceX, and Stripe. Most of these have undoubtedly turned into Decacorns. Below is a chart that showcases the most recent valuations for these companies listed:
As you can see, becoming a Unicorn is already rare enough, but the Decacorn title is only awarded to the crème de la crème. According to recent data from CB Insights, Decacorns make up approximately a mere 5% of the total Unicorn pool:
Majority of the time, these sky-scraping valuations result from long-term forecasting. This means their valuations have nothing to do with the way they perform financially in the current state. In fact, many of these companies rarely generate any profits when they first get running. One of the obstacles many VCs face when a groundbreaking technology or product comes into their vision, is that they have a difficult time accurately valuing the startup because there is none other to compare to, so it's a little bit of intuition, guessing, belief and luck!
A VC fund usually holds three types of companies. 1) “Unicorn” - as you know, a company valued in the billions 2) “Dragon Egg” - the potential to be a Unicorn and is on track 3) “The Walking Dead” - a startup that is consistently operating and making steady returns, however the chances of it becoming a Unicorn are low...unless something very special happens.
Hmm special? A portfolio with a “Walking Dead” startup can play its cards in very interesting ways, and can honestly be the most exciting time for a VC to get in very early on, before it catches everyone else's eyes! Once invested, there’s essentially 3 approaches to how a VC can handle this. 1) Active/Harsh - the VC takes on an active role in changing the company dynamics. For example, replacing the CEO, re-crafting the business plan, or even merging with another portfolio company. 2) Active/Supportive - the VC plays an active nurturing role, where they continue to highlight the company and what it stands for, but may call for a spin-off or pivot. 3) Dormant - the VC continues to accept the steady operation and doesn’t allocate as much time and resources to this investment in future rounds (not-so-exciting approach).
Although a Walking Dead startup may sound inferior, what's so exciting about these startups is that the VC can choose what role they want to play. Oftentimes, this underdog view can spark inspiration to pivot. KEYWORD: PIVOT. Almost all successful companies pivoted. Doing the same thing over again and expecting different results is the definition of insanity, so this calls for change. A pivot is not just changing the product. A pivot can change any of the different things in your business model. A pivot may mean you changed your customer segment, your channel, revenue model/pricing, resources, activities, costs, partners, customer acquisition -- lots of other things than just the product. Times change, technologies change, markets change. To survive, the best leaders realize that their businesses must change as well. And this just might be where the treasure lies.
Remember when Amazon sold just books? And Youtube started as a video-based dating service, where users could upload short videos describing their ideal partner, and browse for potential matches. Xerox switched from selling office machinery to handling business operations such as data processing, and CRM services to businesses and governments around the globe. Groupon started as The Point, where people could get together and rally about social causes. Yelp began as an automated platform where you could ask friends for direct recommendations, when the founders noticed something interesting: Users were writing reviews of local businesses just for fun. The founders decided to run with this and have since built Yelp into a system with more than 17 million reviews.
So what’s the takeaway? As a VC, you don’t need to find Unicorns to invest in. You should aim to invest in Pre-Unicorns, where potential can be unlocked with pivots, and where you can be an early investor and reap all the benefits of the investment once it reaches success - which will be more beneficial than investors who entered in late funding rounds, once traction has picked up. Of course, you want to find the next Amazon or Yelp, but you want to get in on it before they are even Amazon or Yelp. The jackpot lies in pivoting, challenging, adapting, and constant growth in parallel to the current market and demographic, as well as future needs. So your best bet here is to not only invest in the company and product, but more importantly the founder and their malleable personality when facing obstacles. It’s not always the product that gets you the Unicorn deal, but its the founders and their abilities. Invest in people and potential, because although its risky…it brings you the highest reward, and after all, that IS what the VC industry thrives on. So- while everyone else has their eyes mesmerized on the Unicorns, look away and search for the donkey that you can turn into a Unicorn!