I was recently listening to the podcast Master of Scale, including an episode with Mealle Gavet, CEO of Techstars, where she discussed business investment.
It was a lightbulb moment for me and has inspired me to share my sentiments on the concept of unicorn and dragon start-up businesses.
This concept is something I've always thought about but didn't quite know how to express until I heard the podcast.
What is a Unicorn Startup?
What is the definition of a unicorn startup? In layman's terms, it is a startup business worth more than $1 billion.
That sounds fantastic, doesn't it? But only a very small percentage of businesses actually become unicorns, and even fewer of these businesses become profitable, meaning that these businesses consistently need to raise funds just to keep the lights on.
So if these businesses don’t actually make any money, then why are they valued so highly? It’s because these valuations are not based on where the business is now but on future growth and, hopefully, one day turning a profit.
What is a Dragon Startup?
A Dragon start-up, on the other hand, focuses on developing a profitable and cash flow-positive business model with high margins rather than solely on growth.
This allows founders to be both more self-sufficient and more resilient to economic downturns, giving them a much higher chance of success while also allowing them to keep more of their business equity.
When Should Founders pursue a Growth at any cost strategy?
Why might a founder want to pursue the "growth at any cost" strategy?
The three main reasons a founder might want to pursue this strategy are If their business model relies on:
Mass market adoption or market share (i.e., Facebook)
The economy of scale (i.e., Amazon)
Or having a "first mover advantage" (i.e., Uber).
So as you can see, there are cases where growth at all costs is important to the success of a business. In these cases, a focus on raising money to grow as fast as possible while also using aggressive pricing to push out competitors is correct.
Even if the founder is left with a small equity percentage overall or if the business doesn't make money in the short term.
Why is Growth at any cost is overrated for most founders?
The truth is that most businesses don’t have business models that are reliant on taking massive market share, being a first mover, or even economies of scale. It's not that none of these will benefit your business; it's just that they aren't critical to its overall success.
And so it doesn’t make sense for founders to bet their business’s future on a growth-at-all-costs strategy that ignores profit and business fundamentals, forcing you to constantly raise more funds to keep the company afloat while eating away at their equity?
It is preferable for these founders to take a little more time to grow and build a business that is focused on long-term success, with a profitable and positive cash flow business model that allows them to self-fund their growth without being held hostage by investors or banks, and to be able to weather economic downturns better.
Think about it like this: Is it better to own 10% of a billion-dollar company or 100% of a hundred-million-dollar company over which you have complete control and can derive more personal value from long-term growth? I know which one I would rather have.
I have no objections to actually becoming a unicorn. It's just a billion-dollar start-up (and there can't be anything wrong with that) or even raising outside capital to accelerate growth and gain a first-mover advantage.
However, the emphasis on becoming a unicorn and pursuing growth at any cost over simply trying to build a fundamentally strong business that provides value to clients at a profit is hurting businesses more than it is helping, and it is causing many great startups to take a lot of unnecessary risks and significantly reduce the odds of success, while also diluting their overall equity in the business.