Beware of mythical beasts: don’t be a unicorn, build a business

Once upon a time, the word ‘unicorn’ just meant an imaginary horse with a suspect appendage on its face.

Now it’s everywhere – even in business.

Since being coined by ‘Mother of Unicorns’ Aileen Lee of Cowboy Ventures back in 2013 to describe those rare startups valued at over $1 billion, more and more entrepreneurs want that status for themselves.

More seem to be succeeding, too.

CB Insights now lists a total of 258 members of the ‘Unicorn Club’ – a massive increase from the 39 Lee listed in her original Tech Crunch article.

No surprise that Uber, SpaceX and Airbnb all make the top 5 – the former tops the charts with a $68 billion valuation.

Obviously there’s a lot of hype around becoming a $1bn business, and gaining the status and celebrity of the billionaire tech founder.

But sadly, the message ‘if you work 18+ hours a day and get that investment dollar, you too can grow the magical horn’ adds pressure for early stage startups at a time when they really don’t need it.

Is it really a unicorn, or is it just a horse with a cone taped on?

Is being a unicorn really something to aspire to?

We don’t think so.

For a start, it seems many unicorns are overvalued, even by as much as 100%.

When Stanford Professor and venture capital specialist Ilya Strebulaev crunched the numbers earlier this year and applied ‘fair valuation’ to over 130 of them he found that, on average, the shares were overvalued by almost 60%.

Almost half of those he valued turned out to be mere horses – dropping below the $1 billion mark and losing their unicorn status.

The U.S. Securities and Exchange Commission (SEC) chair Mary Jo White seems to agree. She says that;

…the prestige associated with reaching a sky-high valuation fast drives companies to try to appear more valuable than they actually are.

What about the real unicorns?

While there are plenty of startups legitimately valued at $1billion, we’re not convinced they’re successful in a truly meaningful way.

After all, valuations are speculative. It’s not actual money.

More pressingly, the cult of the unicorn has a serious problem with profits.

Sure, they might have revenue – even ailing Snap, parent company of Snapchat, reported a climb in revenue this month, but in the same breath Snap is open about the fact that:

[they] have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

When you look a little closer, the unicorns definitely lose their sparkle.

No fairy tales, just sustainable growth

The plain fact is that most startups fail.

Depending on who you listen to it could be as many as 9 out of 10.

Of those that do make it, only a minuscule amount have a chance of becoming a unicorn. Which, by the way, are far from immune to failure themselves.

Remember Jawbone? Despite a peak valuation of $3 billion, the wearables pioneer shut up shop last July, due to reported ‘financial turmoil’, which in turn lead to all sorts of messy drama and customer service failures.

There’s a lot to be proud of for building a good, profitable business with hard work, a solid plan and a sensible amount of time.

The type of business we admire the most got to where they are by starting small. They grew organically as and when they could in the old fashioned way, by using their own profits.

And they’re the ones who’re able to last the course.

As long-term readers probably already know, we’re big fans of Basecamp here at Lighthouse.

In addition to being just the type of business we’ve just described themselves, they put a lot of time and energy into their excellent podcast, ‘The Distance.’

They seek out businesses who’ve reached the milestone of 25 years, and share their stories to inspire the rest of us to go the distance too.

There’s a hugely diverse bunch on there, from a tofu producer to a hardware store to a classical ballet studio. We thoroughly recommend you dive in and take a listen.

There are a few things that the majority of these long-players have in common, but the one that really stuck out is that they’ve all identified a super-strong need for what they do, and successfully carved out their niche.

When we look into why startups fail, it might seem kind of surprising to see that a lack of cash in the bank isn’t number one reason.

Only 29% of start up post-mortems cited ‘ran out of cash’ as their main problem. Almost half, however, failed due to ‘lack of market need.’

The niches those businesses on The Distance have carved, and their ‘slow and steady’ approach to growth is the reason they have avoided becoming another statistic.

As we enter our 11th year at Lighthouse London (unlocked the decade milestone, woo yeah!) we may not have the status of a unicorn, but we’re proud to have built a business that will last.

Like our man Jason says…