How to Build a UnicornBy Ulises Vázquez | Thu, 07/07/2022 - 10:00
Once called unicorns because they were almost non-existent, private companies with a valuation of US$1 billion or higher are not a utopian dream anymore. The term “unicorn” was coined in a TechCrunch blog post on Nov. 2, 2013 (1). Aileen Lee wrote that according to her research, there were 39 unicorns. CBInsights states that as of June 2022, there are over 1,100 unicorns. This proliferation of companies with that valuation sends a message that unicorn status is an attainable goal.
So, how do we build one? Is there a recipe? Unfortunately, not; but there are some key elements to put in a roadmap.
First you need to understand hypergrowth. This concept is the essential component of a unicorn and that’s the reason why only tech companies can get there. Tech allows companies to replicate the product they are delivering immediately, enabling scalability, thus making it possible that in a very short period of time (five to 10 years) a company can get to US$100 million in revenues to achieve the unicorn category. Understanding replicability and scalability is everything. Imagine you are in the business of providing customized software to clients. Even if you are in a tech industry, that will reduce your replicability because you always need to develop a new product. Contrast that with Microsoft, which developed one first product standardized for everyone and then simply sold a bazillion copies to all of us.
Second you need to find a problem in a big market and be passionate about it. Something that affects people in a large way. Traditionally, unicorns used to appear in four major business models: consumer e-commerce, consumer audience, software as a service, and enterprise software but now the world has seen the rise of fintech, AI, logistics and many other categories. In my point of view, the category doesn’t matter while you are transforming a big industry with tech. Any industry in which the processes are still handmade or depend on human manual work are candidates. What kind of things are possible now with new technologies that were not possible in the past? Before Netflix, people used to go to video shops to rent movies and then cable networks started to sell pay-per-view programs and then video over internet appeared enabling a computer to get premium content where customers paid online. That changed everything in the way we consume movies.
Once you get a big market (over US$1 billion in size) you will need a team. Preferably, you should be an expert in the field you want to disrupt and have the ability to bring in people who are experts in the fields in which you are not, especially tech if you are not a developer. The majority of startups that became unicorns have had more than one founder. And the majority comprise people who have worked together for years, either through school or work. The CTO is the basis for a tech startup because he will be the one in charge of developing the product.
You will need a product that performs 10x better than whatever solution you have in the market right now. First, as an MVP (minimum viable project) just to confirm the market really demands your solution. Uber launched its solution with only three cars and a simple interface mainly to collect feedback from customers and correct everything. That means you will have to iterate and iterate again to find what your customers are really looking for. The first objective of any startup is to find Product Market Fit. The best way to do that is not giving it out for free but really making your market pay for your product to really confirm that people are willing to pay for it and use it.
Once market, people and product are set, you are ready to find investors who will believe in your company. Unicorns are not possible without venture capital, the financial tool that enables companies to achieve hypergrowth. Normally to be able to create that first product or to replicate it, you will need money at a fast pace to match the growth of your product. Founders have to develop good fundraising skills. Understanding how VC investments work and how investors make money out of it is essential.
The first phase of fundraising is getting money to build the product. This is called the pre-seed stage and it means you normally use money from your savings or get money from friends and family. Then you will move to a seed stage in which you will attract external investors who are savvy in the VC world and bet on your company when your product is just starting. Those are called angel investors. Together with micro-VC funds or early-stage VC funds, they can invest in your company to get to product market fit.
The second phase of fundraising and of a hypergrowth company comes whenever you get to product market fit. That changes everything. Your efforts will no longer be in developing a product people love, your focus will switch to how to distribute this product to the world. Your numbers should be growing 20 percent a month (for a consumer product, less in other categories) and you can start preparing for a Series A. That means another round of capital where VC funds bet on your company for the next level. In the beginning, VC funds bet on the market and on the track success of the founders. At this new level, they are betting on the product and the growth you are having.
After Series A, your organization is intended to hypergrow and you have the money to do it, so normally that requires the best talent you can get and that you can now afford. Also, an expanded IT team will be needed to fulfill all the requirements of a growing customer base and a budget for distribution in the way of marketing, sales teams or whatever your business needs to grow. Distribution means how to get to the market and where your customer base can grow. If you started with customers in one city, how do you replicate that for a hundred cities; if it's in one country, how do you start the next one or several? Is your original customer base restricted in some way? How can you open it to a bigger chunk of the market?
To do all these things your processes have to be ready to be shared so the new members of the team will be able to offer the same service in a new location without the founder involved. How can you automatize as much as possible so you can cope with the growth of all the other areas? Normally, one area grows faster so the bottleneck has to be continuously solved.
The culture will evolve and switch from a little company to a medium or big one and adapting to the new company will be a main challenge for employees and founders too. Becoming a big organization comes with corporate governance, which means you now have a board and you are not deciding everything in the business as you did before.
You might think at this moment that you can focus on getting profits from the company but this is the traditional thinking. To be a unicorn, you have to reinvest all and expend more to grow; therefore, you will continue losing money because your game is growth not profits. That will assure your possibilities to get funding for your next round. And so, every round gets you closer to the US$1 billion valuation in a cycle of Series B, C, D, E, etc. until you get there.
This cycle encompasses three phases:
Requires establishing a very audacious goal of growth and changing your mindset. In my own experience, the Mexican paradigm of developing a business is how much money do I have and what can I do with it. This requires a switch to what is the potential of this business and how much money do we need to achieve it.
To get your team the right investors who believe your plan is achievable and super valuable to the market.
Meaning to deliver what you promise in your plan. If you do that, the next cycle gets easier; if not, it could threaten the life of your company. The path to a unicorn needs a frame of mind that maximizes opportunities rather than minimizing risks, so normally that puts you on the edge all the time.
When Aileen Lee described these companies as unicorns, it was because the probability of VC-backed companies reaching a valuation of US$1 billion was 0.07 percent, or one in every 1,538 startups, so it was indeed a mythical animal. Today, your chances are increasing and the wealth creation around that is a reward worth the risk. Moreover, Mexico needs this value creation to improve the quality of life of the whole country. We need more entrepreneurs like you chasing this dream.