There’s been a lot of discussion about ‘unicorns’ lately, or startups achieving valuations above $1bn. Whether or not you agree that unicorns exist and whether or not you think it is a category in itself, they are fascinating. As VC’s, we need to be experts at identifying unicorns. It has been proven that unicorn investments are the ones that make or break VC fund returns.
Tod Francis from Shasta Ventures just published a great post about what B2C unicorns have looked like at the A-stage in “What did Billion Dollar Companies Look Like at the Series A”. We’ve made a similar analysis about B2B startups and the findings are surprisingly similar.
I have dug into the characteristics of B2B unicorns and non-unicorns by analyzing 25 unicorns and 31 non-unicorns. I have been trying to understand the characteristics of the ideas, regardless of how they came about or who started them. The focus is on the stage where the startup is just beginning to form and hasn’t achieved strong growth yet.
I extracted the characteristics I used from several popular business frameworks, picked the relevant ones and adjusted them to be relevant for startups. The characteristics extracted and the mapping to the 25 unicorns is below.
- Potentially huge market
- Novel product
- Ability to create an advantage / difficult to compete against
Potentially huge market
All unicorns set out to conquer a market that is potentially huge. The product has to have the chance of reaching a massive audience and/or being extraordinarily valuable for its users. The equation “potential users” x “value” has to make sense and exceed $1bn.
It’s not an easy task to evaluate the market size of an idea considering we’re mostly talking about new ideas and/or new markets. Analyzing a B2B market is especially challenging. Who are the actual users and what is the value for them? This is where early traction, anecdotal evidence and interviews are required.
Most unicorns are attacking existing huge markets: How we live (hotels, housing), databases, communication, how we move around (taxis, cars), HR, file sharing…
All of the companies have a product that had at least one dimension to them that was novel. The first real SaaS option (Workday), easy important features coming together (Dropbox, Evernote), new utility (LinkedIn, Yelp). These are often non-obvious features for anyone else than the founders or early users.
Ability to create an advantage
This is the most difficult characteristic to analyze. Of course every startup is somehow replicable, but unicorns are able to create strong defenses against competitors. All of the ideas in the sample have strong and sustainable competitive advantages once they are running at some scale.
There are at least two types of advantages in the group:
- Network effects / community
Network effects / community is a more common advantage among this group. Pinterest, Shopify, Twitter, Uber, AirBnB, Slack and LinkedIn all have very strong networks or communities that are very hard to copy.
Some also have a technological advantage that would be difficult to re-create. It seems that you have to have quite a strong technological advantage if you’re going to succeed with direct sales. Workday, Domo, New Relic and Palantir have been able to create a technology that is difficult to copy. They also have to rely heavily on direct sales that will take a longer time.
There are also many non-essential characteristics that vary among the sample group:
- Market Dynamics: Attacking a new market (or overlooked market)
- Market Dynamics: Entering a highly competitive market
- Enabled by a trend/change
- Focusing on tech “invention”
- Obvious value proposition
- Clear path to market
- No strong buyer power
- No strong supplier power
- Unfair advantage
- Mixed models (B2C2B, B2B2C)
These characteristics vary between the companies so it seems that none are necessary characteristics. Some of the surprising and interesting ones might be nr 2, 5, 9 and 10.
In terms of market dynamic, there are two clearly different types of markets:
- Competitive markets with many trying to solve the same problem
- New or overlooked markets
Most unicorns are in very competitive markets, but where no-one has been able to create a winning product. Great examples of these are Slack, Uber, Domo, Shopify and Dropbox.
Some find non-competitive markets and just understand a need that is not being served at all by current player. Examples are Palantir, Square, Twitter, AirBnB, SoundCloud, LinkedIn and Yelp.
As an investor, it’s very hard to understand whether or not competition is already too fierce. If there are many recently launched competitors trying to solve the same problem, it’s important to know exactly which secret they don’t know that you have uncovered. These are highly interesting markets.
Obvious value proposition
Some of the unicorns have very clear value propositions, such as Square (take card payments with your phone), DocuSign (you don’t need to meet for signing). Others are clearly more difficult to foresee (Twitter, AirBnB, Uber) at the initial stage.
For many, and I would say for most people, the value proposition of the latter companies was not obvious before they started growing. Just read some early blog posts about them.
We can clearly see that more traditional B2B companies such as Workday, Domo and DocuSign have more obvious value propositions than B2C2B or mixed model companies like Twitter, AirBnB and Uber.
Many think that you need connections and a background of success to be able to really grow fast. But as we can see from this list, not very many have actually relied on fame in creating their startup. I think Palantir with Peter Thiel and Slack with Stewart Butterfield (co-founder of Flickr) did have a good starting advantage. But they would probably have succeeded just as well without their connections and fame.
Over 50% of the companies in the sample are using “mixed models”. These are often described as B2C2B or B2B2C or B2D2B models. These companies either use consumers as their product for advertisers (Pinterest), use consumers as lead generation (Dropbox) or both (Twitter). Many developer tools such as New Relic and MongoDB have also used “consumers” or developers for lead generation and getting into companies.
It’s impossible to create a recipe for unicorn ideas. The ideas come from a deep understanding of a problem and an ability to make a leap to a solution that is actually useful. But there are some characteristics that are good to understand when starting your startup or looking to invest in one. It’s also good to keep in mind that all companies don’t have to raise VC or become unicorns. In the following blog post I will discuss the characteristics that I think make it highly unlikely to achieve unicorn status. That might be even more interesting from a founder perspective.
So, in summary, I will just say: aim for clearly large markets and focus on figuring out what the required ingredient is to really make the product and business model work. What makes it unique in this market? Do I know a secret that others don’t? And make sure you are creating something that is defensible.
At Open Ocean, we partner with companies where we can understand the novelty of the product and interest has been proven with early customers. We like companies that can broaden their products to capture a large share of a large market and have network effects and are creating a community. For these products you will still need world-class execution to become a unicorn, which we can support you with.
I would be glad to hear any criticism of this or any continuation on a discussion of what really separates unicorn ideas (or early stage projects) from non-unicorns. Did we miss important characteristics that could be added? We will also continue to work on this and share our thoughts.