ver the past 19 years, I have met more than 20,000 startup founders. Not one of them told me their venture sucked. In fact, each believed their startup was the next BIG THING. Each dreamed of having their startup turn into the next Twitter, Facebook, Tinder, or Slack. Each wanted to ride the elusive unicorn.
A unicorn is a legendary animal that has been described since antiquity as a beast with a large, pointed, spiraling horn projecting from its forehead. For venture capitalists, a unicorn is a startup which has a billion dollar plus exit. All professional investors dream of capturing a unicorn: a Google, a Facebook, or a Twitter. However, few investors succeed at such. According to CB Insights, the Unicorn Club is getting more crowded (see below) in 2017 as is the Unicorn Hunters club (i.e. Venture Capitalists (VC) with more than five unicorns in their portfolio).
According to CB, there are 185 private unicorn companies valued at $1B+ as of January 2017. Aggregating the data on institutional early stage investors, and removing one hit wonders, we see that approximately 70 investors have managed to back multiple Unicorns in their history. That means that about 90% of all active VCs have never successfully had a billion dollar exit.
But wait, isn’t the job of the VC to find, fund, and facilitate the growth of a startup towards a billion dollar exit? If so, why do so few succeed in picking winners?
The answer is fairly obvious: no one has crystal ball or divining rod to predict which startups will become unicorns and which will become dogs (startups which fail to return any money) or zombies (startups which constantly seek more investment capital but never return any). Being a VC is less about spotting a winner and more about growing a winner. Notwithstanding, many texts, tomes, and blogs actively seek the magic formula for spotting a unicorn. This magic formula would be a Rosetta Stone for investors; it would allow anyone to spot the next great startup. So, several years ago, my coauthor (legendary investor Brad Feld) and I set out to find the Rosetta Stone of startups. We wanted to crystallize objective criteria that would accurately predict which startups would become unicorns and which would become zombies. After reviewing more than 20,000 pitches, dozens of Techstars cohorts and multiple seasons of Dragons’ Den and Shark Tank, here is what we found: IT IS SIMPLY NOT POSSIBLE.
Unicorns aren’t found, they are built. It is execution not opportunity that dictates the fate of founders. Investors (and founders) are better off looking to customers, not investors, for validation of their venture. So, if you are a founder, look not to the blessings of investors but to the insight of customers and users to guide you towards success.
In the 90s, when my coauthor and I both began backing startups, it would be impossible before funding, to build, test, and nail product/market fit. But that is no longer the case. In the 21st century, founders can build, test and grow their venture without venture capital. In fact, it has never been easier. The cost to launch a digital startup has gone from approximately $2,000,000 in 1997 to approximately $500,000 in 2007 to less than $25,000 in 2017. It is now easier than ever to build and test digital entrepreneurial ventures. Combine this with the ability to access global markets on day one (that’s 2 billion plus potential customers), the rise of crowdfunding sites (e.g. Kickstarter) and the scientific approach to entrepreneurship founded by Stanford’s Steve Blank and Harvard’s Eric Reis and entrepreneurs have all they need to birth a unicorn of their own.
So while no one (other than users) can tell you which startup idea is the next billion dollar opportunity, we can identify common issues that undermine the viability of any venture. This list includes: lack of barriers of entry, deficient domain knowledge, insufficient social capital, a lack of coach-ability, failure to meet the 10x Rule, poor customer development, and non-scalability. Hopefully with this information firmly in hand, Angel Investors can help pivot their ventures toward legendary success and maybe even bred your very own unicorn.
Is it time to quit your day job?
Dr. Sean Wise is an Associate Professor of Entrepreneurship at Ryerson University and has 19 years in the seed stage startup industry. He is the coauthor of STARTUP OPPORTUNITIES: Know when to quit your day job second edition available May 30, 2017.
