In this shifting and tumultuous socio-economic climate — a year is an incredibly long time. In one year the volume of tech unicorns has not only doubled but conversely, according to Bill Gurley, the system that supports these flighty creatures has itself begun to unravel. Maybe there just ain’t enough thread to make this particularly fantastical scene in the startup tapestry stay sharp. Can unicorns learn to ride waves before they wipe out?
If a single year can accommodate entire chapters of dramatic industry change then four years is pretty much an age. It’s significant that it was as long as four years ago that Deutsche Bank Group published an extensive summary of existing research into the competitive returns of the Impact Investment market. In 89% of the studies reviewed they found that companies with high ratings for ESG (environmental, social and governance) factors exhibit market-based outperformance. 100% of the studies showed that “these companies have a lower cost of capital in terms of debt and equity”. In other words, these companies are becoming more attractive investment propositions because they yield higher financial returns.
Now cast your eyes upwards, to the dizzying height of the Silicon Valley vista — an increasingly precarious place to be. We all know the higher the high the harder the fall. And you have to be pretty high to see 160 unicorns. In financial terms, the falls, or down rounds, are becoming a more regular feature of riding the bumpy valley waves. The CB Insights Downround Tracker has identified 57 down rounds in a year — including big names like FourSquare and wearables company Jawbone. This supports Bill Gurley’s claims that too much money in the VC ecosystem has led to less qualified entrants to the market, an oversight of basic unit economics and ultimately, lofty and unsustainable paper valuations.
The question Mr Gurley, and many others are asking, is ‘how much longer can this pattern of astronomical fundraising in companies yet to demonstrate profit last?’. Really, this is a pretty old question — Boom goes Bust, like Boom goes Bap — that endless yoyo of the capitalist beat. But this question has become all the more critical when set against the emergence of an alternative discourse around socially and environmentally impactful companies which, crucially, are profitable. More profitable than their fantasy friends in the valley. This new crew are making waves, not riding them.
Report after report — from all stations on the financial airwaves — echo the idea that it’s the companies that do more good that also make more dough. This epiphany even reached the mainstream financial press this year. Splashed across the front page of the Financial Times in January was the headline: ‘Companies with a purpose beyond profit tend to make more money’. This is a signal for the need for unlikely, fragile, partnerships to be formed. Partnerships between the masters of the old financial bond models and millennials forging new business bonds injected with genuine value grounded in social outcomes rather than the bubble-tastic, floating fantasies of older less wise times.
These bonds will be formed with leadership from companies like Etsy and initiatives like B Corporation. Etsy facilitates 1.5 million sellers, mainly women, to find a market, taking a fractional percentage (3.5%) of the total sale value of each transaction. Added together, these tiny cuts equal an annual revenue of $273.5 million — and an annual profit of around $54 million. That is more profit than Twitter and Spotify combined. But that’s obvious because neither of these VC backed companies have yet made a single dollar in profit. Etsy, a certified B Corporation itself, is one of the first companies to so successfully weave an ethical consumption logic into the language, and demonstrability, of profit and growth.
As we move into an age where the most powerful consumer base increasingly report that they see the main priority of business is to ‘improve society’, evidence of the increasing profitability of impact investing as well as the increasing bottom lines of companies like Etsy (and many other B Corporations besides) will only increase. And as the dramatic waves begin to even out, a new post capitalist aesthetic is being forged. Keep your ears to the ground — it’s closer than you think.
Come and have your say about issues like this at #THINKABOUT2016 — A Day for Bold Discussion about The Future of Business, The Nature of Growth and Startup Mental Health. Friday 28th October at Troxy London. Tickets: www.thinkabout.io
Author: Georgia Meyer — Head of Community and Events at Silicon Drinkabout / Thinkabout
Originally published at www.incubuslondon.com