Unicorns, Unicorpses and Unitards
CBinsights produced a great graphic on the timeline of private unicorns of the past 5 years that has been making the rounds. There are a 143 companies representing $507B in valuation. And of course a fury of discussions about a “tech bubble” and “unicorpses” have ensued.
Having startup-survived the original tech-bubble-burst in 2001 and also the downturn in 2009, I have been paying attention to the articles, blogs and rhetoric. I think there are a few reasons why this unicorn trend is not as concerning as some believe.
“It’s Different This Time”
Andreessen Horowitz produced a presentation called “US Tech Funding” in June of 2015. In the deck, there is one great slide which I think sums up some of the differences now vs. then. Some say the very fact we are saying “it’s different this time” is an indication of a bubble.
But you cannot argue the fact that the macro data points clearly indicate the tech environment is not the same today. The explosion of the internet population (up 6,500%), as well as commerce spending (up 2,433%) has created an internet economy that I believe can support these unicorns.
Subscription Saves Lives
While many of the unicorns are not subscription based revenue models, some are. In fact over 30% are B2B software companies. And because of this model they have more financial stability than tech companies of the past. We took Eloqua from $0 to $100+ million in revenue, and I can tell you that it takes time to get the recurring revenue flywheel turning, but once it does, it is hard to stop for these reasons:
- Often you enter your next fiscal year with 60% of revenue already contracted.
- You have a clear view of customer use and engagement, both individually and compared to a baseline group — so you can detect customer issues early.
- Many SaaS businesses at scale are diversified in their customer base, instead of 20% of the customers providing 80% of the revenue, it is more like 60%/80%. This model is much more resilient to customer churn.
As more consumer startups look to leverage a subscription model (Spotify, Evernote, etc.), we will see a more stable and predictable revenue stream in this segment as well.
A Sheep in Wolf’s Clothing (Unitard)
I read a great article by Sam Altman on The Tech Bust of 2015 . In it he examines the state of tech valuations, and points out that a lot of “bubble theory” is based on large late-stage funding rounds. He has seen some of the terms on these deals, and in one case saw a 2x liquidation preference and 3x liquidation cap. Altman hypothesizes that this is not an equity investment at all, in fact it looks much more like debt financing.
And although the LPs of those funds may raise a stink at some point, we know that debt funding is less costly to a business than equity (venture) funding, but often difficult to get if you are not making a profit. So if these large private unicorns are all raising debt-like financing — isn’t that a good thing? Why not raise a boat load of cash, when you can, on your terms, to secure your future operations.
Market Networks Are The New Black
- Combining the main elements of both networks and marketplaces.
- Use SaaS workflow software to focus action around longer-term projects, not just a quick transaction.
- Promote the service provider as a differentiated individual, helping to build long-term relationships.
In the current list, there are only a few market networks today: Houzz, Nextdoor, and I would argue AirBnB is headed that way. But there are more market network unicorns on the horizon: dotloop, Honeybook, angellist to name a few, and they have strong business models because they focus on more complex transactions, multiple revenue streams, and build long term relationships1.
I think you always are going to have a group of people who is worried about the success of others. But when you look at the summary of my points:
- Macro indicators showcase a healthy internet economy.
- SaaS and subscription models to provide revenue stability.
- Private companies taking on debt-like funding (vs. equity) to secure future operations.
- Market networks starting to emerge as a new category of successful businesses.
The unicorn list doesn’t concern me, it excites me.