Contrary to the popular and heavily hyped assumption that unicorns wouldn’t be possible without VC and that getting VC means unicorn success, the reality is that most unicorn entrepreneurs take off without VC interference because the VC portfolio has many flops and very little flips and unicorns.
· The flop: These are VC failures. Some never live up to hope, while others, such as WeWork, Theranos, and FTX, fail to live up to the hype. The VCs may have hoped for a Unicorn or a Fast Flip, but ended up with a Fast Flop.
· The Flip: These are VC successes that are sold in a “quick” flip to corporate buyers. There are some successful quick flips like Instagram bought by Facebook for 2x the valuation paid by the VCs a week earlier. The annualized return is mind-boggling. Some flips are great for businesses, like Instagram and Facebook. Many, as evidenced by the high rate of failed corporate takeovers, are not – An estimated 70-90% of takeovers fail. Some of these failures are likely VC flips.
· The Unicorn: These are VC home runs when the venture meets expectations and creates loads of wealth.
Share Flops, Flips and Unicorns
To evaluate VC and VCs, traders should consider the proportion of flips, flops and unicorns in the VC portfolio (Designing Successful Venture Capital Funds for Area Development: Bridging the Gaps in Hierarchy and Equity Dileep Rao, Applied Research in Economic Development, 2006. Part 3. Number 2). It’s rare for VC funds to have unicorns in their portfolios, and when they do, they’re primarily in Silicon Valley. VCs outside Silicon Valley mainly have flops and flips in their portfolio:
· Many VCs do not have unicorns in their portfolio. According to Marc Andreessen, approx 15 investments are said to account for ~97% of VC returns. The home runs and best VCs are mostly in Silicon Valley
· A normal early stage VC portfolio has about 80% failures (mostly flops), about 19% are considered successes (mostly flips), and about 1% are home runs (mostly unicorns). While every VC fund has failures, the unicorns are not evenly distributed. That’s why Andy Rachleff, a successful VC, estimates that the top 20 VC funds (about 3%) generate ~95% of the industry return.
Analysis of a VC portfolio shows that VC portfolios with no home runs have low or negative annual returns (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy and Equity Gap, Applied Research in Economic Development, 2006, Volume 3, No. 2). This means that most VC funds fail, including many formed with good intentions to help those who would not otherwise receive VC.
The most important question for you is whether your company has:
· VC-Unicorn with long-term potential and a highly profitable exit – about 1% of VC ventures.
VC Flip, which is usually sold to a large company or an industry leader for a profitable VC exit.
· VC-Flop, which means the VCs quickly lose interest, try to get everything they can, and move on.
Here are 5 strategies to increase your chances of becoming a unicorn:
· Find the right emerging trend with high potential. If you are on a promising trend early, have maintained control of your venture, and follow unicorn strategies to find the fulcrum of the emerging trend, you have a shot at the copper ring. If you started after the trend has set in and the leaders have built a strong foothold, you may still be able to dominate a niche market and turn the business around.
· Take off without VC interference. By doing this, you can keep control of the venture and decide if your chances of success are better with VC as rocket fuel. If you don’t have control over the business and if you have to pivot to find your growth strategy, you might have a flop because the VCs might not be around. That’s why 94% of billion dollar entrepreneurs postponed or avoided VC to maintain control (The truth about VC).
· Focus on business strategy, not product innovation. Entrepreneurs like Sam Walton, Bill Gates, Brian Chesky, Jeff Bezos and others failed to come up with a ‘better’ product. They came up with a better business strategy for the emerging trend. In fact approx 9 out of 10 first-movers fail to become smart movers.
· Pray for good timing. Beware of the phase of the stock market cycle. If you’re in the middle of a hyped up market, when pigs can fly, you might be able to sell a mediocre business as a high flyer and have a flip or unicorn on your hand. If you are in a falling market, watch out below.
· Prove your potential. Can you prove you can dominate the main segment of an emerging trend? VCs want proof of potential – not promises in pitches. Get the skills to prove potential. Wait until you have proven your leadership potential for your business and yourself to maintain control over your business and the wealth you create.
MY TAKE: If you need VC to grow and want to avoid becoming a flop, wait until you take off and prove you have the potential and skills to dominate. Then you are more likely to build a flip or a unicorn. But even after Aha, make sure you get VC from a fund that has a track record of building unicorns. Very few funds build unicorns. Finally, if you want to increase your chances of creating wealth and keeping more of it, stay in control. Get unicorn skills, like Michael Dell.