Many investors proclaim to be unicorn hunters. They are not stalking mythical animals but looking for companies that will reach valuations of over $1 billion. While that can mean success for investors, the WeWork fiasco, in which the company fell from a valuation of $47 billion to a rescue value of $5 billion in a matter of months, has made many pause and reflect.
High valuations can be meaningless cul-de-sacs: just because a founder has convinced investors to part with their cash, it does not mean they can run a good business.
“A new kind of startup founder will emerge,” predicted LinkedIn’s co-founding editor Isabelle Roughol in LinkedIn’s 20 Big Ideas that will change your world in 2020. This kind of entrepreneur is the anti-thesis to messianic founders like WeWork’s Adam Neumann, who promised to change the world and chased huge valuations.
Instead Roughol sites the Zebra manifesto, written by entrepreneur Jennifer Brandel, which makes the case for companies that focus on building sustainable profits at reasonable speed. Brandel chose the zebra to present her point because “zebra companies are both black and white: they are profitable and improve society. They won’t sacrifice one for the other.”
Elena Gertsberg, who runs Adar Advisors, a family office investment company, agrees, although she has not coined an animal for her investment strategy. At Adar, she is looking for companies with growth potential and steady cashflows, that can return 3x – 5x of their value. To make these returns, the family office sells their stake to later stage venture capitalists, who may indeed help turn the start-ups into unicorns at a later stage.
However, Adar’s initial focus is not whether a company might become a global behemoth like Facebook, but whether it has strong cashflows, a promising market and growth potential. Like many investors, Gertsberg also looks to see whether the start-up has synergies with her fund’s larger investment portfolio. For example, companies that make different products for the same target customers could benefit from cross selling.
Alexandre Lazarow, author of Out-Innovate: How Global Entrepreneurs from Delhi to Detroit are rewriting the rules of Silicon Valley talks about yet another beast: the camel. Camels companies are “organizations that can capitalize on opportunity but can also survive in a drought.” Lazarow focusses on entrepreneurship outside places with supportive eco-systems and economic stability, like Silicon Valley, New York and London.
He argues that the Silicon Valley model, which “has codified what a startup should look like, dictated how it should be built and defined what its culture should be” is not applicable to most other places in the world. Regions where consumers are averse to trying new products, angel investors are few and far between, and bankruptcy carries heavy legal or social cost, moving fast and breaking things is an unrealistic expectation. Instead, he delves into the strategies that entrepreneurs use to build scalable successful businesses, without the cushion of easy venture money and supportive ecosystems.
Silicon Valley’s dominance as the global hub of innovation is not at all over, but new voices are emerging to show that venture funded fast growth and valuation inflation has alternatives.
In part, these alternatives are a response to high profile failures like WeWork. In part, they are also arising because the Silicon Valley model of fast growth at all costs is simply not available to many entrepreneurs.
Are you an angel or venture investor? What do you think of Silicon Valley’s venture model? Has the WeWork fiasco changed your stance? Tweet your thoughts to @sophiamatveeva