Do Unicorns Really Matter Anymore?
It’s official: Y Combinator is a unicorn factory.
That’s my takeaway from the announcement earlier this month that the Silicon Valley-based accelerator program has minted more private, billion-dollar companies than Techstars, MassChallenge, 500 Global or all the rest, according to?PitchBook. In fact, roughly 4.5% of the startups that have gone through the Y Combinator program since 2010 have reached the unicorn milestone, and 5.4% of them that went through between 2010 and 2015 got there. The program’s startups have raised a total of $80.9 billion over the last 12 years, with two-thirds of that focused on its unicorns.
It’s really no surprise. Y Combinator has been an early investor in a long list of household names, including Airbnb, Coinbase, DoorDash, Dropbox, Instacart, Quora, Reddit, Stripe and Twitch. Naturally, success in this business breeds more success.
But should we really care?
Yes, in tech, growth and scale both matter. The bigger you can get, the more revenue you can generate and the broader the impact you can have on the world and your market.
And a lot of people have followed that playbook. As of this month, there are about 1,200 unicorn companies around the world, including many “decacorns” (valued at over $10 billion, and even “hectocorns” (valued at over $100 billion). It’s a segment of the market that has been growing for years.
[Side note: The Three Comma Club mention in the subhed is from a character on HBO’s Silicon Valley who was, let’s say, passionate about being a billionaire. The character itself was based on real-like Mark Cuban who apparently?can’t resist the opportunity to cash in?on that little connection.]
There are a lot of underlying reasons as to why this is happening that I won’t go into here (including a softening IPO market, increase in the availability of venture capital, new demands from alternative investors, concerns about oversight, etc) but the fact is the bar for success in tech for at least the last 15 years has been reaching that $1B mark.
But these days things are different from when Google, Facebook, Amazon and other “pioneer” unicorns were setting the stage for this. All of those (to use just three examples) are category defining innovators that arrived at just the right time, with the right product, and dominated their market. It made sense that they would join the billion-dollar club.
But take a look at the latest list of new unicorns from?CB Insights…
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That list just includes the top companies that have reached unicorn status since March of this year (and their methodology is a little hazy, so I’m not sure when they start their count or how they verify their data). Notice anything?
That’s right, none of these companies would qualify as well-known among everyday people. I know eToro, Avenue One and Runway pretty well given what I do for a living, but there’s no Uber, no Twitter, no other big names on this list that jump out.
Sure, these folks are “new” and maybe they will eventually get some of that recognition. But I think there is something else going on here.
The unicorns are going niche.
The opportunities in tech, both in Silicon Valley and beyond, are no longer in massive, consumer markets. Those problems — from semiconductor design, to the desktop computer, to mobile hardware, social media, etc — have all been solved. Today’s opportunities are in niche markets like financial services back office technology, AI analytics and a bunch of other areas that, while exciting and dynamic, hardly get people fired up about the possibilities. It’s not necessarily a bad thing or a bad sign, just a different dynamic from what came before.
So, does $1B still matter anymore for startups?
Yeah, it does.
Capital attracts capital:?The VC space has been going through a bit of a rough patch for the last year or so, and when that happens everyone rushes for safety. And, in VC, nothing is safer than a sure thing, an investment in a proven, growing company that’s dominating its market. On the flipside, few things are riskier than taking bets on unproven companies. A unicorn has proven that it knows how to raise and (usually) make money, making further investment a no-brainer. That fact is elevating the winners from the losers much faster than before, and those that fall behind are finding it more and more difficult to raise later.
Private market runway matters more than ever:?The SPAC boom of the last few years was supposed to help hundreds of strong private companies succeed in the public markets, and it did bring a lot of new IPOs to the table. But the results have been mixed to say the least. In the end, there’s a good chance that companies will be even more gun shy going forward having seen what happened to so many of their peers over the last few years once they hit the scrutiny of the investing public. Companies frankly need to remain private for as long as possible now to set themselves up for the best possible exit, and that calls for more and more rounds of capital to fund operations. See above for the advantages that unicorns enjoy there.
There’s no time for plan B:?Finally, as the tech market in general continues to split up into silos, even comparatively new technologies like AI and machine learning are already sorting into winners and losers. There remains a significant first mover advantage in all of this and no time for companies to pivot and try new things. This isn’t social media, where innovation was happening across a dozen different platforms at the same time. There will likely be one primary solution to each of these market problems, making it a zero sum game. You’ll be able to spot the winner by who gets the biggest, the fastest.
At the end of the day, a private company valuation is just a number and there’s no guarantee that a unicorn will fare any better than their competitors who might be just a little bit smaller. But maybe they have a better product, better service or better pricing. Who knows? But, as long the incentives to remain private remain, we’re going to continue to see larger and larger private companies and the list of unicorns will grow. For that reason alone, they’re worth paying attention to.