22 April 2015

Why Unicorns Matter

Call them unicorns.  Or bubble companies.  But there is something significantly relevant about the technology startups that have joined the $1B+ valuation club.  When investor Aileen Lee coined the phrase "unicorn" in late 2013, there was an estimated 40 companies on the list.  Now there are almost 100.  Whether or not these valuations prove in or not is a hotly contested debate right now;  but what is missed is how important these companies are to the world.  To consumers.  To innovation.  To the balance of power.  Whether or not venture capital IRR's are met are not.

Most can remember the time of the DOS operating system and the step change that occurred for consumers once the upstart Microsoft released Windows.  Good timing and strategic blunders by the hardware vendors at the time (i.e. IBM) afforded Microsoft to quickly gain a dominating position in what became arguably the most important market on the planet.  Forget that hasn’t been any meaningful innovation to the computer operating system since then; it never mattered to Microsoft's shareholders.  It still controlled over 90% of computers.

You can see similar domination by many of the new technology incumbents in markets very important to consumers and enterprises.  Apple took a similar approach and market share gain in mobile phones (at least now it’s a two horse race with Android).  Oracle and Salesforce have dominated the enterprise software space for many years now.  Amazon crushed every meaningful ecommerce company that stood in its way in the 1990s and 2000s.  Google continues to dominate search.  Facebook boasts 1 in 7 people around the world as active users.  While many of the new incumbents appear much more friendly that its predecessors (i.e. “Do no evil” compared to Ballmer’s Dr. Evil appearance), their market dominance should continue to be tested.  Enter the unicorns.

Uber may not only be a cab company but also a formidable commerce competitor in the all important race for local services.  Pintrest and Nextdoor have cult-like followings that Facebook has not had since it was in the university setting.  Hootsuite and Palantir have a leg up on the big data front compared to Oracle and IBM.  The unsustainable profit streams of big pharma and large healthcare service providers will be tested by ZocDoc and Theranos.  And even the country itself faces stiff competition as many of the unicorns such as Meituan and Flipkart are based in Asia. 

In a lot of ways, the unicorns took similar paths to the preceding incumbent technology companies before them.  They gained aggressive valuations through market acceptance, university connections, speed, innovation, and strong management teams.  And now, thanks to frothy capital markets, they now have cash warchests to compete with any incumbent.  These valuations afford flexibility, independence, and an ability to pace growth based on long-term vision.  The beauty of many of the unicorns is that their business models are very low cost and highly scalable; in fact, many of them don't need cash now but are raising funds for the future and to cash in on generous capital markets.  

Its true that Apple or Google could acquire many of these companies if they wanted (and will);  but they can’t buy all of them.  While each individual company creates unique challenges and competition to market leaders, the litmus test of success will come over time.  Once the bubble pops, will the unicorns continue to thrive, keep prices down, and continue to provide innovative products and services to the market? I don't know if I believe in unicorns or not, but i don't think it matters.  They are here today.  They are preparing for battle.  And lets hope they win.

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