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I Believe in Unicorns (More)

A tweet yesterday from First Round capital partner Brett Berson has a good question. At first glance I thought, “there have to be hundreds of examples” but could only come up with a few:

The robo-advisors Betterment and Wealthfront have either scraped $1 billion valuations or come close. Their growth seems to have stalled or appreciably slowed since Charles Schwab and Vanguard charged into the market. I also thought maybe Zynga and Blackberry could count as examples, and Tesla’s story is still playing out. Another commentator mentioned Tivo.

In the last 25 years there have been probably over a thousand unicorns, and only a handful of them are made into unicorn meat by the incumbents? That’s pretty meaningful.

This is not to say any startup that was briefly valued as a unicorn did not subsequently implode. Perhaps the majority do. Still, it means at a certain mass, your destiny is in your own hands. (Also, a reason not to be too worried about competition, if at all.)

The moniker unicorn first came from a 2013 Techcrunch piece by venture capitalist Aileen Lee. That piece characterized the status as a financially meaningful one for VCs:

Why do investors seem to care about “billion dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns.

The Berson tweet suggests an operational advantage that comes at this state of company development.

Godin’s daily blog post today the Problem with Unicorns is that there are none. This is surprising. If Berson is right that there is a meaningful drop off in externally-induced mortality, it’s wrong. So much of Godin’s work is about creating a narrative, some shared belief with a tribe, in order to have lasting value. “Unicorn” is a concept, just like “large capitalization stock.” Of course anything highly conceptual is more prone to inducing excess belief than their more clinical etymological cousins.

That which doesn’t kill a startup makes them stronger. The seeds of destruction might be planted in their origins (Fab, Foursquare, almost everything in the late 90s…almost.) Still, this thought exercise that maybe there is an escape velocity that insulates them against predators has interesting investing implications. Maybe there is a meaningful threshold where the Innovator’s Dilemma really kicks in and it’s at the $1b valuation.

(The most interesting import of this for me right now is thinking through the wave of consumer food startups. What could, say Hormel do to kill ButcherBox?)

The primary risk for unicorns is a change in the financing environment. Lyft might be a supermassive black hole especially to Johnnies-come-lately but it is still a supermassive company that is highly highly unlikely to be killed by some incumbent transportation provider.

Published inBusinessInvesting

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