The billion dollar startup was once the stuff of myth, but now they’re everywhere, backed by a bull-market and founded on new, disruptive digital technologies and business models. A company that has achieved a valuation of $1 billion dollars or more within five years of first opening their doors is commonly known as a Unicorn. We even have the Super Unicorns that have achieved a $100 billion valuation within five years of startup.
What does it take to create a Unicorn?
The latest research by Crunchbase (September 2017) details:
The number of private companies with post-money valuations exceeding $1 billion:
| Companies | Total Valuation | Funds Raised |
| 267 | $920.8 billion | $176 billion |
Unicorns that have been acquired or achieved an IPO:
| Companies | Total Valuation | Funds Raised |
| 59 | $241 billion | $35.3 billion |
Emerging Unicorns with a valuation between $500m and $1 billion:
| Companies | Total Valuation | Funds Raised |
| 95 | $63.7 billion | $16.3 billion |
Below we look at the different stages of development for companies and what is needed to achieve the hyper growth required to herald Unicorn status.
The Six Stages of Company Evolution
Most founders will tell you that many of these stages happen in parallel.
1. Creation
Picking the right business to be in is the most important decision when starting a company.
Aim your startup at a problem that you deeply want to solve. Your startup should be based on a problem that you already know well and that matters to you.
The majority of European Unicorn founders are in their 30s, with an average age of 35. So founders will typically have real business experience prior to going it alone.
Many of the fastest growing companies in the last decade have developed platform business models to connect consumers and producers. The platform creates an exchange where an unlimited number of users can interact and transact.
Like Facebook, Uber or Alibaba, the businesses do not control inventory but create the means of connection. Successful platforms facilitate exchanges by reducing transaction costs and/or by enabling externalised innovation. With the advent of connected technology, platforms can now create ecosystems to scale in ways that traditional businesses cannot.
Rules of thumb:
- Simple ideas are the best
- The idea solves an existing, mass market problem
- The product is often differentiated in the market place but not always a one of a kind
- The user experience is simple
2. Development
Entrepreneurs are often surprised by what resonates with customers and what does not.
If it were up to PayPal co-founder Max Levchin, he would have kept working on the details of an operating system for a digital wallet instead of responding to persistent customer demands to build an electronic currency for eBay.
You can find out the right path for your startup more efficiently through A/B testing. For your two best ideas, develop a clear description of your product with lots of pictures and show the first idea to one of those groups and the second idea to the other. Ask each group whether they would buy the product, how much they would pay, and how frequently they would buy.
Repeat this process until you have figured out which product features generate the most resoundingly positive response.
Facebook has a philosophy that “done is better than perfect” meaning they would rather launch a product/service and then use customer feedback to fine tune the product. This way they develop the product according to actual customer needs and not what they think will sell. This is a very different approach to the traditional small company product launches whereby you felt you only had one chance to hook key customers and as such the product had to be right.
Put yourself in the shoes of the customer, understand and empathise with their end to end customer journey and keep simplifying the user experience.
3. Commercialisation
Based on current unicorns, your best chance is to start a business that is revenue-growth rather than user-growth based. It has to be selling from day one.
User-growth startups – Facebook, Instagram, Twitter, Vine, YouTube, Snapchat – are all in the same business — self-promotion.
All other businesses need to focus on revenue generation and must have people paying, and happy to be paying regularly. Startups like Uber, Airbnb, SaaS companies, hardware companies, all start moving money from the day they ship. As well as being willing to pay for your product/service, customers must already be spending money on this area in their life. Money has been coming out of their wallets for a current need or want, whether they’re happy with this or not. But in either case, they’re very aware of the fact that they’re at least semi-regularly spending on it.
“If a potential customer tells you that your product is interesting, you will never get a sale. In order to get people to pay for your product, they must convey a sense of urgency: “I need this product now. How soon can you deliver it?”
Motti Vaknin, Israeli venture capitalist.
Technology is advancing amazingly fast and successful Unicorns will use it to offer a new way of satisfying a want or need that was previously just not possible. This is the basis for building a fast growing customer base as long as your new way is incomparably a better way of doing that same thing.
4. Funding
A Unicorn typically needs £90m of investment, with 10% raising £190m or more.
In order to raise institutional capital, you will need a strong team. Friends and family will invest in you and the pre-existing relationship you have with them. Institutional investors will be betting on your business model, positioning/timing, and your team.
“In our portfolio there is a correlation between cash required and long-term market cap—but it’s negative. The more you raise, the less value you create. Google, Cisco, and Oracle were incredibly efficient with their cash, as were ServiceNow and Palo Alto Networks. Those companies all had market caps north of $10 billion within a couple of years of going public. One curse of raising lots of cash is you lose that discipline. We discourage our teams from raising too much capital.”
Jim Goertz, partner at Sequoia Capital, one of Silicon Valley’s oldest venture capital firms.
5. Promotion
You can have the best product in the world but if no one knows it exists, it’s never going to sell. Promotion is all about brand awareness and is vital for Unicorns as the scale of client acquisition required is unlikely to be achieved through marketing alone.
Mobile and social media are the key to capturing seamless engagement between your user bases.
You may want to start with a website to test your initial markets, but perfecting your engagement model through mobile and social media should be your absolute first priority.
6. Expansion
Move into new markets before nailing your home market
Unicorns need to build sales quickly with an initial threshold of achieving $25m of sales in their home markets. A winning sales and marketing organisation must be tailored to the needs of the customer.
To warrant a billion dollar valuation, you typically must generate revenues of $100m+. You are unlikely to achieve this in your initial market and will need to go after the right global market. Such markets should have at least $1billion in sales and will need to be favourable in terms of language, law and demographics. Garner customer feedback and be willing to tweak the product according to the need of customers in the new market.
The key markets are the US, Europe and Asia. You will probably need to find local partners that share your vision and have the right skills and incentives to gain a sizeable share of foreign markets.
Important Note
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.