I’m sure all of you know one or more of the 200 or more young companies that are currently valued at one billion or more by investors and stockholders. These are popularly called “unicorns.” Some of the most well-known include Uber, Airbnb, Snapchat, Xiaomi, and Pinterest. What every entrepreneur is asking me these days, is “How do I get to be a unicorn?”
The first thing I have to remind everyone is that the odds are stacked against you, just like in a lottery. Based on some good estimates of how many new ventures have been started in the last five years, the statistical odds of any individual startup making it to this level are less than one in a million. But, of course, that doesn’t mean you shouldn’t try.
The fact is that valuations are largely set by top venture capital investors and financial firms, and they all have their own proprietary formulas for assigning value. But let me assure you that in the final analysis, the numbers and key elements are highly subjective. Yet there are a common set of driving factors that every entrepreneur should know, including the following:
Extraordinary marketplace traction. If your new venture is still in the idea or development stages, don’t even think about a high valuation. Premium ventures need real traction, such as 100 million users, 10 million in revenue, or brand recognition around the world. It helps to have a following of loyal advocates in the mainstream press.
Active interest by a multitude of investors. When top tier investors compete for a piece of the action, the price can go up exponentially. If you don’t yet have a hundred investors knocking on your door, it’s time to put more focus on viral marketing, closing customers, and exponential growth. Keep working on increasing the momentum.
Experienced team of superstars. Every investor bets on the jockey, more than the horse. It may be time to bring in a new executive team with visible integrity and a sterling track record, or round up some new advisors who have connections with the venture community. Don’t be afraid to give up equity to get a small share of a very large pot.
Opportunity and scalability are unlimited. The target market better be a big one, certainly over a billion dollars, with a double-digit growth rate, and large enough to absorb multiple entrants. Scalability in the worldwide arena must already be demonstrated, with plenty of growth potential ahead. Most unicorns pop up first in new solution categories.
Strong intellectual property and defensibility. Patents and other intellectual property are a necessary initial “barrier to entry,” but these are just the beginning. Additional defensibility elements that unicorn investors look for include speed of implementation, rate of revenue and user growth, and exceptional team strength and leadership.
Credible yet flexible exit strategy. The number of new ventures that successfully navigate the path to a public offering (IPO) with big numbers is still small. The smartest ventures are always courting a multi-billion dollar sale or merger with giants in the industry, including Google (YouTube), Microsoft (Skype), and Facebook (WhatsApp).
But remember, things that go up fast can also come down just as fast. More and more pundits are predicting that the unicorn bubble has grown through hype beyond sustainable value, and will soon collapse. They point to the valuation implosion of former superstars Groupon, Dropbox, and Zynga, which have dropped to valuations that are a fraction of their once lofty numbers.
In addition, achieving unicorn status brings a new set of challenges to a young growth company. The pressure is always on to take more money, to drive the valuation higher and stay in the spotlight, just at the point where a company begins to make money rather than burn through it. Too much money often leads to bad decisions, and has led to the demise of more than one promising growth venture.
But, I’m not suggesting that you take the focus off of valuation. The numbers may be relative, but the principles behind them won’t change, and work for smaller startups as well as unicorns. My advice is to aim high, but be realistic in negotiating with investors.
Unrealistic valuation expectations are one the key reasons that investors walk away from a promising startup, leaving you with no valuation, and perhaps no future. You have to earn a billion-dollar valuation, not declare it. How well does your new company stack-up today?
*** First published on Inc.com on 09/29/2016 ***