By Robert Strohmeyer
Silicon Valley was founded on a culture of innovation, entrepreneurship and hope for the future. But to a significant extent, it was also built upon delusion. Legendary examples of astronomical growth and overnight wealth have created an environment where investors, entrepreneurs and workers often buy into the allure of the “unicorn” startup — new businesses that rapidly grow to a billion-dollar valuation.
The dream of the unicorn is appealing, but the reality is rare. Far more common are businesses that have come to be known as “donkeys”: sturdy and dependable and far less prone to spectacular failure.
A dangerous cocktail of survivorship bias, the gambler’s fallacy and outright wishful thinking have led much of the business world to forget the basics of growth and profitability and take a leap of faith to grab for the brass ring of the unicorn exit. The last six months have stripped that delusion of its finery — again. The early 2000s saw a massive flameout of unrealistic startup plans that left millions of workers and investors in the lurch when the dot-com boom went bust.
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The startup world eventually came back stronger, but history has a way of repeating itself. Venture-backed startups are now being plucked off on the cheap by private equity firms, and Silicon Valley Bank, once a stalwart of the venture funding fantasy, has collapsed in spectacular fashion.
Now more than ever, job seekers should be looking for healthy business basics when evaluating their next employment opportunities and beware of shimmering unicorns. Here’s why.
Betting your future on a unicorn opportunity is innately risky. According to CB Insights, only 1% of startups achieve the billion-dollar valuation that constitutes “unicorn” status. So the odds are 99:1 against you, and it’s extremely difficult to evaluate all the strategic elements that give a company the winning edge while you’re interviewing for a job.
Having a CEO who played a role in a unicorn once before doesn’t mean it’ll happen again. New startups touting former Google, former Apple and former PayPal executives aren’t necessarily more likely to achieve Google- or Apple-like growth in today’s market. The tech world has changed. Investors and consumers are more sophisticated, there’s more competition than ever, and it’s no longer that easy to deliver PayPal-like innovation in the 2020s.
Twenty years of success stories have generated an atmosphere of survivorship bias, convincing us that if we emulate the qualities of those who succeeded, we will achieve the results they achieved. In reality, the changing market conditions, technological baselines and buyer expectations have made the growth rates of prior decades more difficult to achieve.
The old, back-of-the-napkin math of the unicorn world held that companies growing 100% per year to an annual revenue of $100M could sell for a 10X multiple: the unicorn.
It was a repeatable formula long enough that most people in the Software-as-a-Service (SaaS) world believed it to be achievable for their companies. I myself led teams in one such company, growing from $15M target earnings when I joined to more than $85M in just a few years.
But during that time, growth rates across the industry began to slow. Now, the reality is that almost nobody is seeing the kinds of revenue retention and new-business metrics that gave rise to so many unicorn exits over the last decade. If unicorns were generally rare over the last decade, they’re likely to be even rarer now.
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While the failure rate of startups overall is about 70%, the attempt to intentionally create a unicorn is inherently riskier. Taking on $10M in venture capital to build a business, and fueling that with multiple nine-figure rounds, creates intense pressure to succeed. As the Pavilion CEO remarked in a recent LinkedIn® post, even with $20M in the bank, chances are you’ve got only 10 months of runway before you run out and have to raise again or die. If your earnings aren’t on plan by then, you’re done.
Since 99% of companies don’t succeed, that means a reckoning at some point, usually in the form of disappointing stock valuations. Given that most startups offer employee stock options as the major carrot to would-be workers, this is no laughing matter. Nobody wants to see their piece of the dream drop to near-zero value in a private-equity acquisition as the company declines from unicorn aspirations to donkey status.
By definition, donkey startups take on less capital investment, and that means they need a faster path to profitability. Investors in donkeys demand a sound business model at the outset, evidence of a proven market opportunity and a rock-solid path to profit. In exchange for these things, they settle for lower growth than a unicorn would offer, and a less risky bet for their money.
Workers joining a donkey startup are very likely to see about the same professional growth opportunity as they would in a high-growth startup, since all startups require a high level of scrappiness and consequently reward workers who shine under pressure with promotions and new opportunities. So, in consciously seeking out a donkey startup over a unicorn, you trade in a lottery ticket for stability, and sacrifice little.
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This is mostly subjective, but donkey startups are likely to be better places to work than high-pressure, high-growth startups. By nature, donkey startups are built for the long haul, not a short launch to the stratosphere that’s likely to flame out.
Unicorn cultures tend to have a four-year horizon, encouraging a we-can-sleep-when-we’re-dead mentality that isn’t good for anyone. In lieu of 401(k) matching, they offer high-risk stock options, then demand workers drive themselves to burnout in pursuit of increasing valuations.
Donkey cultures prioritize sustainability, focus and achievability over stratospheric aspirations. Because donkey exec teams know stock value isn’t their carrot, you’re more likely to find 401(k) matching and reasonable time-off policies in a donkey startup, and less likely to be worked till you drop.
In all probability, we will continue to see big headlines about unicorn exits in the months and years ahead. In context, however, it will almost certainly continue to be only a fraction of a percentage of all companies that achieve that outcome.
(Or inflation will make it so that a billion dollars just isn’t worth as much as it used to be, so the goalpost will move.)
Looking at those headlines, it may be hard not to wish you’d taken a ride on that unicorn rather than the donkey you’ve chosen. But when we consider the patterns of the past, which aren’t that different from the patterns we’re seeing right now, it’s clear that the safer bet is always the donkey.
After all, unicorns are rare, at least in part because almost nobody knows how to create one reliably. Long live the donkeys.
ABOUT THE AUTHOR
Robert Strohmeyer is a serial entrepreneur and executive with more than 30 years of experience starting and running companies. He has served in leadership roles at three successful software startups over the past decade, and his writing on business and technology has appeared in such publications as Wired, PCWorld, Forbes, Executive Travel, Smart Business and Businessweek. He lives in the San Francisco Bay Area.
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