5 ingredients to build momentum unicorns

There are a set of startups that are momentum based. Some examples are Consumer Internet startups (think GMV for commerce and DAU / MAU for content) and Fintech startups (think GTV / # of accounts). The reason they get funded is their ability to grow quickly, utilize large amounts of capital and attain significant market share. The thesis is - these are startups in very large markets and scale can make them dominant and very valuable where they control large parts of the eco-system. This is in contrast to startups in SaaS or Consumer Brands, which tend to be fragmented, i.e. multiple smaller and profitable players can co-exist. We have seen consumer brands and SaaS build to several million dollars in revenue with solid economics. Relatively small amounts of funding can propel them further.

The momentum startups are attractive to VCs for the large wins they can potentially offer. Hence, even though mortality is high, VCs keep funding them since as a portfolio, you can model returns. Higher risk, higher reward. Some traits of such startups that succeed are:

1.?????A unique breed of founders: I am reminded of the reality distortion field that Steve Jobs talked about. Given the courage that is required to both raise and spend large amounts of capital, it’s imperative for these founders to be fantastic story tellers, believe in a vision, sell it to employees and investors and generally maintain irrational exuberance. There is no scope for self-doubt, at least visibly.?

2.?????Plentiful capital: It’s difficult to build these startups in a capital constrained fashion. There is never enough time, there is always competition. It also greatly helps to have precedents, the infamous X of Y to be able to drive macro level beliefs and a fertile eco-system with capital availability.

3.?????Careful maneuvering of Unit Economics: At least in the Indian context, I have seen economics staying poor for a very long period of time.??Now we have seen companies even going public with negative unit economics. The thesis is that economics will work out at large scale and / or with GDP growth, but we still haven’t seen it in most cases. On the other hand, we now have several multi billion dollar startups which are pre-revenue or have very little revenue. I have seen some companies / investors have a lot of focus on unit economics ostensibly too early and this results in disasters. It seems impossible to have massive growth AND awesome unit economics at the same time. The companies that succeed seem to measure unit economics very diligently, work on more mature cohorts to get closer to positive, but not take their eyes off the very reason they got funded – growth and market share. I have seen VCs investing in a company since it grew rapidly and then immediately focus on unit economics, curbing the growth completely, with disastrous results.

4.?????Growth and retention have to be looked at together: Many startups try to solve for retention at a smaller scale, let’s say at 100K DAU. They spend time getting it right and claim – look we have 30% retention. However, when one goes from 100K to say, 1M, the user demographics completely changes, you go deeper in your user base. Same thing when you go from 1M to 10M. Hence, the problem of growth AND retention has be looked at together and solved together. There is no sense in pausing and solving for retention for a long time. One has to both grow and simultaneously improve retention.

5.?????Up or out: In my experience, these startups are finished the moment they stop growing, even for 2-3 quarters. Invariably, a new breed takes over, self-doubt surrounds you. Looking for an exit early on to a different startup in that space is a good idea if yours starts looking dicey. Since capital burns are high, it gets harder and harder to fund them and keep going. This is like riding the bull. If you fall off, you will get trampled.

Momentum startups are definitely not for the faint hearted, neither founders nor VCs. When they blow up, they look like a really ugly cricket shot, which should have never been played. Statistically, many of them blow up. However if you can be a part of one that succeeds, in whatever capacity, it can be a very rewarding journey.

What kind of startup are you in?