Founders chasing Unicorns – DON’T!

Image source: The Guardian

• Only 23 of the 100 unicorns, or startups valued at $1 billion or more, managed to achieve profitability for a financial year

• Zomato and Nykaa had shares are down 67% and 43% from their peaks, respectively. Paytm even more so.

These are some figures I showed a client recently during a counselling session. With the 100th Indian Unicorn making headlines the pressure to get larger valuations and achieve the coveted Unicorn status is only getting more intense.

007’s dilemma

For this article, let’s call my client 007, for his ambition and tenacity to get stuff done.

Now, 007 has a great business idea – which works well! In start-up parlance his ‘proof of concept’ made him ripe for his first major round of funding – all within approximately eighteen months from starting. The progress is commendable and great by all measures.

I wondered why he was in the chair across from me – a business coach and therapist. Everything seemed to be going rather well. Turns out he felt inadequate and not successful ‘enough’ because he didn’t turn into a Unicorn yesterday!

The mission

He had two clear asks of me. One, how to get Unicorn valuations, and how to handle to pressure until then and thereafter. Credit where it’s due, the man is aware of the pressure he is putting himself under.

Situation evaluation

One way of dealing with these objectives would be to dive right – set goals and milestones, draw a roadmap with checkpoints, etc.

Alternatively, one could pull back for a moment – and think! I simply asked 007 ‘why’ he wanted to become a unicorn so badly. There were the obvious answers; the fame of a great valuation, to get rich, be successful as he saw it... Deeper probing and an uncomfortable silence revealed that he really wanted a well-timed exit, and move on to the next business ‘idea’.  

The gamble

Looking at the start-up news section and one can’t blame him for wanting what others get seemingly easily. Call it the culture of the ‘start-up roulette’ that has been created in the last few years. Never know which ‘idea’ gets funded and which viable ‘business’ is left to fend for itself or vice-versa.  

There is however, one big difference that the ‘house’ and founders tend to overlook. Ideas get valuations but it is a ‘business’ that really survives and gives a return on investment!

While founders want to surf the funding tides, I feel the onus of creating the waves and the environment lies more with the funders. All free markets cater to demand. Founders come up with what they think VC Funds want to fund. It was earlier about consumer packaged goods, ed-tech, and now fin-tech seems to be the flavour of the season (or perhaps something new).

Indiscriminate funding of ‘ideas’ instead of actual businesses affects the fund’s own hit rate and cash burn. Additionally, it also creates a false air of optimism that makes people think any half decent ‘idea’ will get funded.

Both parties eventually get a rude shock at the ‘proof of concept’ stage. End consumers pay for a tangible product or service that is differentiated, and delivers on a clear promise. As the ‘idea’ flounders and fades into oblivion, it leaves the funders poorer, and founders more damaged than rich.

Is the party ending?

With rising interest rates and subsequent inflation, funding streams are seeing a ‘rationalisation’. Quarter-on-quarter data points to a slowdown in Indian startup funding too. From the record quarterly funding of $17.1 Bn in Q3, the tally fell to $14.5 Bn in Q4 2021 and then $11.8 Bn in Q1 2022. There is now lesser money to go around, and hence greater discernment. The recent downsizing and firing by Vedantu is not the first, nor the last in the list of casualties. The real victims or collateral damage will be the employees left out in the cold, in some cases even without their final settlements.

The clean-up

As my session with 007 came to a close, we agreed on two things. One, that he needs to remain focused and not get distracted nor seduced with stories of crazy valuations. It is alright to grow a little slower. Secondly, he needs to continue building a tangible business that is differentiated, offers customers genuine value and experience.

At the end of the day, I think we all just need to step back and remember that while ideas may get valuations for now, but only real, tangible businesses create long term value!