In This New World, What Is the New Unicorn?

We have to allow for historical context and explanation behind the gradual erosion of basic business fundamentals, and advent of the unicorn culture

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The term 'unicorn' was first used by Aileen Lee, founder of Silicon Valley-based VC Cowboy Ventures, referring to the 39 start-ups in the US that had reached a valuation of $1 billion. She called them a 'unicorn' to emphasize the achievement and rarity of these 39 start-ups. Almost a decade since, there are over 1,200 unicorns globally and over 600 in the US alone.

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Little did she imagine that the term unicorn will become so ubiquitous with start-up success: a milestone every founder dreamt about, every investor trying to collect more like it's a Pokémon and capturing the imagination of anyone remotely interested in the space…until recently.

Like Chuck Rhoades (a fictional character from the television show Billions) says to his counterpart "they might be cheering now but they are dying to boo"…and booing they are, louder than ever.

Unicorns, per the original definition, are rapidly losing their appeal. It is commonplace to find criticism of the unicorn culture, mostly something along the lines of 'cash-burning machines', 'living in denial', and 'growth at all costs'. These ideas are further amplified and reinforced by pop culture and media by demonizing certain founders such as Adam Neumann (WeWork), Elizabeth Holmes (Theranos), and Sam Bankman-Fried (FTX). Like most things in life, this is not black and white, facts exist somewhere in between and it's always wise to not generalize based on exceptions.

We have to allow for historical context and explanation behind the gradual erosion of basic business fundamentals, and advent of the unicorn culture. We also need to move forward from here, improve the conversation and perhaps, redefine what a unicorn means in today's environment.

Let's start with the basics: Y Combinator defines 'start-up' as a small, early-stage company designed to 'grow fast', 50-100 times in the initial years then subsequently 10-20 times in later years as it becomes larger (before normalizing growth). Why does a typical start-up need venture funding? Put simply, to 'grow fast' (or scale) – fund the losses in its initial years as it invests in the product, R&D, marketing, and team but with one promise – there will be excess profits for years to come once it has found a scalable product-market fit.

So, if we go by this definition, most start-ups initially are meant to burn cash. What happened is some people stretched the number of years it's ok to keep burning cash and even started spending more to earn less with a complete disregard for basic unit economics – as long as one could spin a story of making excess profits in the future, one could keep raising at higher valuations than the last – this was further exacerbated by the growth/late-stage private market investor boom which not only accepted but encouraged the behaviour (think Softbank).

A company could stay private longer while finding those elusive excess profits and when they eventually did go public, the retail investor was sold on the further growth prospects which justified peak valuations, and more often than not, was left holding the bag (think Zomato, Paytm). All this was ok until the money was cheap/interest rates low, and the world was oversold on the COVID-19 bounce back but --- every party must end, and this did as well…interest rates were hiked, and we returned to living as we were pre COVID-19, to an extent.

In this new world where money is more expensive – all capital allocators are facing competing priorities, be it the endowment funds deciding which venture fund to invest in and how much percentage to allocate across asset classes to the venture funds selecting between shoring up existing portfolios or backing new founders then on to founders making decisions around retrenchments, pulling back on ad spend so they can preserve capital for an apparently uncertain future.

Ultimately in this New World – what is the New Unicorn? Tracking back to the genesis of the term -- a company that deserves praise, is rare and ubiquitous with start-up success? It is a start-up which serves customers profitably through technology and can do so on a long-term (sustainable) basis while driving customer demand (revenue). At its foundation are founders who have a radical acceptance of the current environment and an astute capital allocator mindset. Start-ups can only survive (and eventually thrive), if they create value for their customers and capture value for themselves at the same time.

Long as you can take these steps and survive, there will be capital available in the future, a well-known fact that VCs in India alone are sitting on nearly $16 billion of dry powder, majority of which is waiting to be deployed.