Entrepreneurs: Listen to siren songs, but don’t chase unicorn status at any price
Aspiring and young entrepreneurs often (rightly) dream to start and run unicorns. While that highly sought-after status is a holy grail, remember that it is neither a means nor an end; it’s just a socially constructed representation that shouldn’t obliterate business, human and social fundamentals.
Image via ourgallerystore.com
Jeff Koons is the world’s most expensive living artist. His Balloon Dog (Orange) — not exactly the one pictured above — sold for over USD 58 million in 2013. The 12-feet sculpture changed hands, from one private collection to another, at Christie’s in Ney York City.
Four years later, the same auction house organized another record sale: that of Leonardo da Vinci’s Salvator Mundi. The painting’s ownership transferred from a Russian oligarch to the Abu Dhabi Department of Culture & Tourism for a staggering USD 450 million.
Debating whether these sums are “justified” by any means is senseless. First, because as long as there is an agreement between a seller and a buyer, the price is justified. Second, because it’s impossible to compare them to the inherent value of the object. Third, because the buyers may expect to earn money on these artworks too, especially given the superlatives and press coverage they have received.
In a way, we can draw parallels between the art world and that of entrepreneurship and startup funding. Assets change hands, prices are agreed and often publicly showcased, a high price tag is a proxy for prestige and quality. Having a Koons in your living room or office is like having a unicorn in an investment portfolio.
Today, as an entrepreneur the yardstick for success is indeed to create, grow and run a so-called unicorn startup, a private company valued at USD 1 billion (there are about 300 of them as of today, collectively worth just south of USD 1 trillion). Just 2 of them are French, and they are far back on the long tail of the list.
When declared a unicorn, your startup almost instantly becomes a market favorite. Your company hits the headlines, journalists want interviews, private wealth managers start calling you at home. It’s a personal and professional achievement. “One billion is better than $800 million because it’s the psychological threshold for potential customers, employees, and the press,” said Slack’s Stewart Butterfield in 2015 about this “arbitrary [and] big round number.”
Apoorva Mehta, then the (28-year-old) CEO of Instacart, said in the same article that “it absolutely gives us credibility and the ability to hire some very important people [and] it tells the world that we’re looking to build a long-lasting worldwide brand instead of looking to get acquired.” Today, Instacart is still independent, has raised more money and consolidated its unicorn status. But not everyone seems to share this strategy.
In startupland, fundraising, merger and acquisition headlines travel faster and wider than any other piece of news. It’s one of the best ways to get free PR. It’s positive, but it’s misleading. Raising a lot of money is like learning you will have triplets… a lot of work coming your way! Approaching unicorn status is exhilarating, generates media interest, but comes with massive pressure to grow profitably over time.
The flattered entrepreneurs are not the only ones to blame (let’s be clear, everyone is free to have its own drivers and motivations!). The investment ecosystem is also very widely contributing to this fundraising and valuation frenzy, mostly out of fear to miss out on opportunities and to build their VC brands or affirm their territories. And the media inflates the bubble even more.
Yet, it is increasingly well-known that publicly communicated valuations ought to be relativized. Avolta Partners has calculated that, on average, there is a 32% “bullshit gap” between what is being announced in the press and what startups effectively receive on their bank accounts. So, while it’s understandable for aspiring unicorns to inflate their funding round sizes in the media, this PR-tactic may lead to back-of-the-envelope calculations about total funds raised, but it doesn’t directly contribute to develop the business.
Also, apart from the money that has been said to be raised, studies have shown that even “proven” unicorn startups may not deserve the (vaguely-defined) term. Zirra has calculated that the top 20 unicorns are overvalued by an average of 27%, and a joint research project by the University of St. Gallen and Villanova University estimated the average VC-backed unicorn reported a valuation 49% “above its fair value.”
Another reason is that every 1 billion valuation isn’t the same. “I don’t think a lot of people realize that once preferred stock and liquidation preferences come in, their common stock isn’t worth much,” James Park from Fitbit explained to The Economist, “an investor might be happy for the company to talk as if it has achieved the $1 billion valuation as long as he has his extra guarantees.”
In other words: he’ll inject money at an exaggerated valuation — close or alone 1 billion — just to be able to say he has a unicorn in his portfolio. He will have backed himself with “complex stock mechanics [which] often come at the expense of employees and early shareholders, sometimes drastically reducing the actual value of their stock,” Bloomberg explains. While this is perfectly legal, just have in mind that it biases the equation.
Maybe the “unicorn” label — and the credibility, coverage and aura that come with it — is worth the approximations. These are legal and commonplace. But they are fooling everyone, from investors to entrepreneurs themselves. “Media coverage [of] unicorn valuations has caused otherwise level-headed entrepreneurs to expect investors to participate at prices which are detached from their startups’ fundamentals,” John Greathouse writes on Forbes.
Eventually, isn’t the market the only one to decide? “The duct tape securing the faux unicorns’ horns won’t hold up to the market’s scrutiny forever. The inevitable outcome will be the collapse of the weakest [unicorns] while those with sound underlying business models will be recapitalized with reasonable valuations” he says.
Maybe, you won’t even need to recapitalize. You will have built a sustainable and balanced business model. The money will come mostly from your clients, who will pay you more than your investments and expenses, and it will come less and less from VCs or banks. Maybe you won’t only aim for an exit — another overly mediatized strategy part — and you will concentrate on building a business that will last for generations to come.
Google was never worth $1 billion as a private company. Neither was Amazon. Ultimately, there are a hundred different ways to succeed as an entrepreneur. For some, running a unicorn may be the ultimate goal, it’s a dream to chase, a powerful source of hope and determination. Listen to the siren