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The Street Herd: Too Many Unicorns, Too Little Money

These days, billion-dollar start-ups are the norm. Even more fantastical: large-scale profits for insurgent businesses.

The word “unicorn” has become its own verb in the business world in recent years.

Initially used ten years ago by venture capitalist Aileen Lee to characterize 39 start-ups that had achieved a $1 billion market valuation, the term quickly gained recognition as a mark of entrepreneurial achievement, indicating that the founder had put together a strong team, was seizing a significant market opportunity, and had a clear route to becoming the industry leader.

But unicorns are no longer unusual. According to data by Bain, nearly 2,500 businesses established in the past 20 years have been valued more than $1 billion in both the public and private markets.

Unicorns that can survive without constant venture capital infusions are considerably less prevalent. In fact, only a small number of businesses founded throughout the previous 20 years have been able to generate significant profits from their activities, according to our analysis.

This begs the question, “Is it time to move past the pointlessness of discussing market value and instead concentrate on what it takes to succeed as a start-up?”

A $1 billion valuation is undoubtedly a significant accomplishment, but it has been made simpler by the substantial influx of venture capital that has entered the market in the last ten years, propelled by the success of companies like Google and Amazon as well as low interest rates. Many businesses with unproven business plans have been able to regularly raise capital at higher multiples from investors wagering on the future thanks to the gusher.

However, raising capital and producing cash are two quite different things, and business owners who create long-lasting models are aware of this from an instinctive standpoint. Although they understand very well that they must raise cash in order to build for the long run, they are not obsessed with valuation in the short term. Our research on the Founder’s Mentality has shown us that outstanding founders are instead driven by a daring desire to do something genuinely helpful for clients and a steadfast commitment to establishing businesses that will leave a lasting impression on their sector. This is a multi-year effort with three $1 billion goals in mind right from the start:

$1 billion worth: audacious plan. Investors are confident in our ability to establish a leadership position over time and in our long-term market opportunity.

$1 billion in revenue each year: Market acclaim. A wide range of consumers find our product or service appealing, and the business has gotten good at luring and retaining them.

$1 billion in cash flow per year: Validation of the business model. We can make enough money with our company to reinvest in market leadership and long-term growth. (To maintain a high bar for the performance of business models, we only consider cash flow after deducting the value of stock-based compensation.)

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