Unicorns are so….fashionable. You know what they are right? Startups valued at at least $1 billion, amazing right?. Right now in the US there are over 80 unicorns, mainly in Silicon Valley. One of them, Square, just went public at a valuation of $6 billion which was felt to be a low figure now. Hmmm.
Now there are so many unicorns that there is a new word for the biggest ones – decacorns, worth over 10 Big Ones. Uber is one (valued at over $50 billion) and Airbnb is another, valued at around $25 billion. Snapchat is worth around $16 billion. If you have a startup worth under a billion, you’ve really missed the boat.
The vast majority of people and tech literati would say that it’s simply impossible to predict if a startup will become a unicorn. As usual I disagree, very humbly of course.
Do you remember the First Rule of Startups? You must have something different and totally proprietary. That is, you must have invented something clever that no-one else has invented. Or, if you didn’t invent it yourself, then it should still be something different that you have somehow found, identified, copied or stolen, maybe all of the above.
As in Apple invented lots of things like the Apple operating system, the iPod and the iPhone. Google which invented modern search. The photocopier from Xerox. The first Nintendo game machine. The spreadsheet from VisiCalc. In all of these cases a founder or founders invented something new and highly proprietary.
If someone copied it they would get sued. If they tried to reverse engineer it, it wasn’t as good. So the company that created the product was able to charge high prices for its products because there was very little competition. They would get very high gross margins. That was what led investors and venture capitalists to invest in them, because their profitability was so high. And the reason it was so high was that it was clever and proprietary. All beautifully circular.
So for most of the entire time that countries and companies have been doing tech startups, the mantra has been that when you do a startup, it should be based on a product or service that was very clever, highly proprietary. Did I mention clever?
But the unicorns don’t do this! Their approach might be summed up as follows: don’t make it clever, don’t make it proprietary. Address a very basic human and social need. Make it stupidly simple. Make it easy to copy. Just make it the first of its kind!
So Airbnb shares your apartment or house. Uber and Kuadi share a car. Snapchat sends an email which disappears. Not too smart right?
These are low IQ but everyday needs products. Instead of appealing to ultra-smart nerds such as computer programmers, mathematicians or software gurus, these products and services appeal to the Great Unwashed like me. We all understand their appeal and advantages immediately. Their social target has changed from intellectual aristocrats to the peasantry.
Communal laundries. Shared toilet washers. Shower together (kidding). These are the hot unicorns of the future!
In that way, if a company is going to take off and immediately become a unicorn, everyone knows it. There’s no hanging around waiting for it to happen. And that means you can raise huge amounts of money immediately without investors having to think about it since the model is not proprietary and simple to understand.
It’s the anti-proprietary model of startups. Just like startups were always told to avoid. That way, if it’s successful, no other company can catch up to you. It's the first-mover advantage that we had all been told had finally gone obsolete.
So there’s a secret to making your startup into a Unicorn. That secret is – don’t have a secret. Make it easy to copy. Make it ultra-easy to understand. But it’s got to be something that meets very basic human needs that millions of people want, immediately. And once you start the company you have to invest vast amounts of capital immediately, even if it isn’t profitable and might look as if it will never be.
What If you want to do a “Clever” Startup?
So what this is saying is that “clever” startups that rely on proprietary secrets and clever math or ideas, are an old-fashioned way of doing a startup. Sure they can still work if they are clever enough. And sure they can still be valuable. But they will never be as valuable as a startup that successfully follows the dumb Unicorn approach.
Clever startups have now officially become old-fashioned and retro. They belonged to the 20th century, not the 21st. Clever startups essentially lost their panache with the Dotcom boom and bust of 2000 and 2001.
Here’s what seems to have happened. There’s a very high failure rate in the old-fashioned type of clever startup. Even if you are really clever, there’s always another person or company that’s even cleverer. If your product or service is based on cleverness, it can either not work, or be beaten by later clever competitors.
Basically a clever startup is road-kill. It’s always going to be a short-term phenomenon. You can beat clever people if they are small, but you can’t beat a giant, even if it’s a stupid one, or at least not for a very long time because of their huge amount of capital and their sheer size.
A unicorn gets its strength not from its cleverness but from being so big that no other company can ever muster enough money to beat its massive distribution. A unicorn prevails because it’s childishly simple to understand and it has more money than anyone else.
Unicorns are too big to fail. Their market strength lies not in their intellectual assets but in their capital and their sheer size. Goliath deja vu all over again.
What if Your Startup isn’t going to be a Unicorn?
Now this is not to say that you should not do a startup, even a clever one. It’s to say that if you do a startup, you need to understand the model it is following.
Basically there are 3 models:
The basic product or service is not clever, not proprietary and appeals to relatively few people. It’s a commodity but you can make it work because you are a good salesperson. It’s going to be a short-term company if it’s run by professional managers and will only be long-term if it’s run by a family where loyalty and relationships are far more important than brains and vision. It won’t need any or much capital and it won’t be worth anything significant at any time.
The product is clever, highly differentiated and abstruse, that is, hard to understand, at least for the average Joe. The company will have to be run by highly-educated professionals. It will need a lot of capital and that certainly won’t guarantee success. It will be short-lived on average since it will attract other competitors who also have clever people and clever products. The likelihood that it will ever be worth a lot of money is very low. It will probably take several years to be successful, if ever.
This is aimed at average people with a universal need. It will require huge amounts of capital without which it won’t succeed, but if it does, it can expand very quickly and is unlikely to ever see significant competition. It will survive long-term if it succeeds, unlike most clever companies. In order to survive and prosper it will need to make friends in government since it appeals to popular instincts and since it affects more of the population than clever startups.
Depending on your product, desired startup and your own personal and professional objectives, you can choose any one of these models and then you will suffer the different impacts characteristic to each model. But there are some desiderata:
As they say, size matters.
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