Not Enough Unicorn 

Many would-be founders imagine themselves at the helm of a startup that rockets them to immortality: funded by prestige venture investors, invitations to keynote speeches at tech conferences, the subject of puff pieces in high-profile industry press. No matter how modest or reasonable their original ambitions, there is always the sneaking fantasy (wish? hope?) that  we will be called up from obscurity to stardom like Lana Turner in a Hollywood drug store.

There’s nothing more American than the surprise tycoon – just an average person going about their business and stumbling into wild success. Our media has celebrated it for generations and it’s easy for any of us to imagine that such a thing is just around the corner. Who knows, right? Like lottery players everywhere, founders say “hey, it happens all the time – why not to me?” 

Institutional venture capitalists are well aware of this trope and leverage it on a daily basis. Like golden-era film agents trolling Hollywood drugstores, they style themselves as savvy experts who can spot a success before anyone else does, and with their cash and connections and the penumbra of success that comes from their brand, they are the kingmakers. As a founder, receiving a blessing from a VC is often perceived as akin to getting into an Ivy League school: once you’re in, you’ve pretty much made it. Right, kid? The rest might as well be history.

Except that not only are the odds of “being discovered” vanishingly small, they almost never happen. And even after the fleece-wearing Silicon Valley version of the cigar-chomping Hollywood agent “discovers” you, your odds of success in business don’t get much better. In fact the bigger the scale of stardom to which you’re called, the less likely success will occur.

The terrible blessing of heightened expectations

According to the New York Times on December 7, 2023, “data from PitchBook reveals that approximately 3,200 private venture-backed U.S. companies have gone out of business in the current year, having raised $27.2 billion in venture funding.” Companies like office space behemoth WeWork, hospital AI firm Olive AI, and digital freight network Convoy, once juggernauts of institutional investment, have all gone toes-up in recent weeks.

“Venture investors say that failure is normal and that for every company that goes out of business, there is an outsize success like Facebook or Google,” says the New York Times.

First of all, of course they see the world that way. They’re counting on it. The “outsize success” of the true unicorns in their portfolios are intended to offset the wide swath of egregious failure and wasted resources lavished on the others. Their entire investment strategy is based on that logic.

If a firm can show their limited partners a healthy return from the big bets that pay off, the GPs can raise their next fund, collect their management fees and points of equity, and toast to a good year from their sprawling estates in Atherton or Portola Valley. Never mind the cost to the founders, employees, and customers of their failed investments.

What’s worse, many of those failures, shrugged off as the unfortunate but inevitable costs of doing business, are often at their core pretty good businesses. If your venture can provide a product valued by customers and can operate sustainably and profitably, you’re meeting a societal need. Hospitals are better off with Olive AI and the trucking industry benefits from Convoy than they were without them.

The problem is that these companies aren’t profitable enough… from the perspective of their investors’ portfolio strategies.

And let’s take a look at that. Just this past April, Convoy raised $260M at a $3.8B valuation. Supply chain efficiency remains a critical problem to be solved in today’s global, post-pandemic world. In 2022 the company grossed $630 million in sales. News reports cite “a massive freight recession” as one of the causes of their demise – revenue for 2023 was on track to be less than two-thirds of the previous year. Which makes sense – lots of businesses based on the pandemic world were caught flat-footed when things went back to “normal.”

But the other reason? “A contraction in the capital markets.” Meaning: they were hemorrhaging money and no one wanted to give them any more. Sure, interest rates surge, but Convoy had clearly expanded too fast, spent too much, and made too many promises of too much growth to too many people. It seems easy to imagine leadership and management at a high-flying company looking at the numbers and saying “Should we be spending/growing/risking this much? I’m not sure any of these revenue estimates are actually achievable,” while the VC down the hall is yelling “More unicorn!”

Convoy was a victim not of its own success – the core business was still generating a blistering $350 million in annualized revenue after being in business just a few years – but of not being able to deliver enoughsuccess to satisfy their unicorn-desperate investors.

A bumper crop of unicorns?

Back to the Times: “the number of private ‘unicorn’ companies worth $1 billion or more exploded from a few dozen to more than 1,000” between 2012 and 2022.

An astounding statistic. Is this because hundreds of truly transformational concepts and truly well-run businesses suddenly emerged out of nowhere over the past decade? Or could it be because lots of “pretty damned good” ventures were inflated by cash-rich and unicorn-thirsty investors to grow beyond any reasonable hope of success?

In the sober light of day, it seems obvious that a venture’s success is not and should not be measured by the amount of investment it can amass before flaming out in spectacular fashion. That would be like saying we want our finest, most luxurious buildings to fall down before they’re even finished. After all, “for every ten platinum-plated high-rise that collapse into rubble, we get one that doesn’t. That’s great financial engineering, baby.”

While hard to argue with the institutional VC community from a pure value-to-shareholders perspective, there seems something deeply morally flawed in calling a unicorn-led investment strategy that results in billions of dollars of value being wiped away “successful,” even if it does make the limited partners and investors in the surviving company wealthier.
One could imagine a happier world where investing resources to improve the success rate of one’s entire portfolio would yield a better overall return. It might even reduce the ungodly pressure on the near-unicorns out there and prevent them from flaming out prematurely.

And it might have the added benefit of creating benefits for founders and employees and customers and society as a whole.