Startups Don't Need Unicorn Aspirations to Attract Investor Attention

Investors fixated on finding the next startup to attain the exalted $1 billion valuation inevitably miss many very good investments.

learn more about Richard Maclean

By Richard Maclean

Shutterstock

Opinions expressed by Entrepreneur contributors are their own.

Are unicorns real? That's a question a lot of investors have to be asking themselves these days. To investors a "unicorn" refers to privately held companies with valuations of $1 billion or more. At last count, there are 145 of them, according to CB Insights, a number that robs them of any uniqueness. About the only resemblance these sought-after startups bear to their ancestors from medieval bestiaries is their mythical status.

For many reasons, we've chosen not to join the chase. Now in our fourth fund since 1999, we have slightly less than $1 billion under management. That, plus the 2,700-mile distance from our headquarters in Charlotte, N.C. to Palo Alto, probably puts our growth equity firm out of the running for unicorns. Even so, we would never put these beasts in our sights. Here's why:

Scarcity.

Real unicorns are truly uncommon. For every Uber, Pinterest or Palantir, there's a Gilt Groupe or a Groupon, companies that launched with amazing trajectories but have since faded. Even successful high fliers like Spotify and 23andMe have had trouble proving the durability of their business models. Fact is, the true payday titan (10x plus) is a rarity. We would much rather stalk small, but lucrative prey: B2B software and tech-enabled services companies with valuations between $50 million and $100 million.

Related: The 5 Steps From Startup to Unicorn

Deal flow.

To join the unicorn hunt, you have to be an Andreessen-Horowitz or a Sequoia Capital at the start of the chase or a DST Global at the end of it. Since competition to get in the game is fierce for the most hyped opportunities a well-established Silicon Valley franchise and large investments are required. It also means sharing the spoils with Series C, D, E and even F investors. We tend to go our own way on deals, seeking direct alignment with management teams of potential growth companies that are typically outside of the major tech markets where potential unicorns reside.

Risk.

When pursuing unicorns, you commit to high expectations and a narrow set of outcomes: It's generally IPO or die; swing for the fences or strike out. Even an IPO may not meet some investor expectations. You have only to look at a company like Square, which just went public at a valuation of about half what it was worth a year or so ago, to see the fate of many rare beasts. Our preferred profile is to invest in B2B companies already executing in smaller but well-established markets. We find it more fruitful to focus on the risks of execution and teamwork, rather than the perils of technology development and consumer adoption -- the more common birthing grounds for unicorns.

Related: Want to Join the 'Unicorn Club'? Here's What 3 Companies Did to Get There.

Burn rate.

Most unicorns require significant feeding to grow. If they're pioneers, they need to spend mightily to introduce themselves and create awareness. Big data companies must pour on the resources to develop their systems. Consumer-based unicorns are generally not capital-efficient models, either, having to spend mightily to gather the necessary market share. We're happy to write $10 million to $40 million equity checks, then we help the management team deploy the resources to fund responsible growth in an established market catering to enterprise customers versus consumers.

Ego.

There's no rule that says an entrepreneur's swollen head is directly proportional to the size of the latest funding round or to the celebrity of their investor. But investing in unicorns is a game unto itself. Most of our entrepreneurs are more focused on down-to-earth advice and lining up with objectives and culture of an investor. Launching and expanding any company can be humbling. We like to establish close, long-term relationships with our portfolio companies, adding value pre- and post investment. We're all after the same goal: successful growth with an attractive risk/return profile.

Exit.

Big IPOs tend to get all the buzz. So do multi-billion-dollar acquisitions. Fact is, most of M&A in technology involves less sexy companies in the middle market. These much more modest exits still provide great returns for investors and management teams as long as the companies are not over-capitalized and focus on reasonable valuations that don't require a big public offering. We target much smaller loss ratios and a 3X-5X return on our typical investment. These exits tend to be found in the private markets, with strategic acquisitions or sales to larger private equity groups. Those deals don't always create headlines or huge offerings but the strategy rarely disappoints and it makes for happy investors who keep coming back.

Truth is, you don't have to be a unicorn to be great technology investment.

Seth Harward, a principal at Frontier, contributed to the post.

Related: 4 Ways to Scale and Capture Your 'Unicorn' Horn

Richard Maclean

Managing Partner at Frontier Capital

Richard Maclean is a managing partner of Frontier Capital, a growth-equity firm focused exclusively on software and technology-enabled business services companies. As a cofounder of the 16-year-old Charlotte, N.C.-based firm, Maclean focuses primarily on managed IT and healthcare management software and services investment activities. He currently serves on the board of three portfolio companies: talentReef, Healthx, and Celergo. 

Related Topics

Editor's Pick

This 61-Year-Old Grandma Who Made $35,000 in the Medical Field Now Earns 7 Figures in Retirement
A 'Quiet Promotion' Will Cost You a Lot — Use This Expert's 4-Step Strategy to Avoid It
3 Red Flags on Your LinkedIn Profile That Scare Clients Away
'Everyone Is Freaking Out.' What's Going On With Silicon Valley Bank? Federal Government Takes Control.
Leadership

How to Detect a Liar in Seconds Using Nonverbal Communication

There are many ways to understand if someone is not honest with you. The following signs do not even require words and are all nonverbal queues.

Business News

New Mexico Is Hiring Professional Bear Huggers -- Here's How to Land the Dream Job

The American Black Bear was selected as the state's official animal on February 8, 1963, by the New Mexico Legislature.

Productivity

Having Trouble Focusing? Here's How to Become Unstoppable in Your Performance

Here are a few tips on how to improve your focus, discipline and ability to complete projects.

Business News

'Invest In That Future Now Before It's Too Late': Bill Gates Calls For Global Pandemic Response Team In Op-Ed

In the same month that the World Health Organization called the coronavirus a pandemic three years ago, billionaire Bill Gates reiterated his call for a "fire department for pandemics."

Leadership

Pros And Cons Of Leadership Coaching: Is It Right For You Or Your Company?

Leadership coaching can work really well in some cases and not so well in others. It all depends on a few factors and if your company is ready to make the leap.

Business News

Carnival Cruise Wants Passengers to Have Fun in the Sun — But Do This, and You'll Get Burned With a New $500 Fee

The cruise line's updated contract follows a spate of unruly guest behavior across the tourism industry.