Sean Wise has an eye-opening article on Inc.com This Study of 195 Billion-Dollar Companies Found 6 Counterintuitive Truths About Building a Unicorn, After 15 months, 300 hours and 100 charts, here is what researchers discovered about creating billion-dollar startups.
I’m going to list the six success factors in building a unicorn, adding a few comments of my own about how these findings relate to both mentors and founders. What is not addressed in the article, which I think is important for the vast majority of entrepreneurs who don’t build unicorn companies, is are these same factors key to creating a valuable company, just not one valued at a billion dollars or more?
Ali Tamaseb, a founder turned venture capitalist at Data Collective VC, gathered data on 65 key factors from all 195 unicorn startups based in the U.S. His work included all startups since 2005 that have publicly reached a valuation of more than $1 billion. The least surprising finding is that almost 60 percent of billion-dollar startups were created by serial entrepreneurs. In fact, he found that 70 percent of billion-dollar founders were “superfounders,” or founders with at least one previous exit of more than $50 million.
1. Industry knowledge isn’t required.
Certainly this is contrary to the received wisdom. But just as interesting to us mentors is that 80% of founding CEOs in healthcare and pharma had direct experience in their target market. Mentoring groups often reflexively bring in additional mentors with direct industry experience once a startup emerges from the very initial stages of company formation. From the study’s findings, this is only necessary in two verticals, which are closely related, healthcare and pharma. Unfortunately, neither Sean Wise nor the researchers speculate on what it is about these two verticals that requires domain expertise. My guess is that both are heavily regulated industries – see my post about the fourth risk – and that domain expertise is needed to navigate the complexities of government regulation. You don’t learn that in business school nor by doing a startup in an unrelated vertical.
2. Technical CEOs aren’t necessarily more successful.
I heard a great quote from an MIT VMS mentor the other day: “It’s not the technology, its the psychology.” Meaning that the customer and their psychology is what is decisive about a venture’s success, not the novelty or even value of the technology. This does not fly well at MIT, otherwise known as the Massachusetts Institute of Technology. Virtually every founding team is either all engineers or engineering dominated. So again, this finding is very helpful to mentors as we help founders build their team. This finding that successful tech founders vs. business founders are a 50/50 split was also found to be true of the author’s VC fund, Ryerson Futures.
3. You don’t need to be capitally efficient.
I was trained by the many VCs involved in my four VC-backed startups to “stretch the dollar” – they demanded capital efficiency, but only to a degree. As one vc told me, “Steve you’re going to waste a million dollars in this venture, but I don’t know which million, and that’s ok.” According to the study less than 45 percent of unicorns were capital efficient. This certainly jibes with my reading about vc-backed startups – vcs are willing to put hundreds of millions into companies they believe will ultimately scale and go IPO, like Uber. This doesn’t mean that mentors should tell founders to be profligate in their spending, but only reinforces the “Nail it, then scale it” maxim. The function of external capital is growth and scaling, not creating product/market fit.” So I would say you need to be capital efficient until you reach product/market fit, after which you can focus on adding fuel to your rocket to gain escape velocity.
4. It’s (usually) not OK to be a copycat.
It’s no surprise that more than 60 percent of unicorns had a very high level of differentiation compared to incumbent firms. The worst strategy is copying what another startup is doing, especially if that startup is well funded. As a mentor I do preach differentiation and I believe that is the received wisdom.
5. You don’t have to be first to market.
Being first to market was a popular catch phrase and strategy in the dot com boom. Since that time few people I know see it as a formula for success. However, what the study found is that the best markets for billion-dollar startups already have a number of large incumbents, and often the startup uses the inefficiencies of these incumbents as a point of disruption. This is really important! What it tells me is that the size of the market opportunity is very important, but being first to that large market is not. In fact this finding jibes with my belief in the maxim “No competition, no market.” Founders need to concentrate on large market and should not be discouraged by the presence of large incumbents.
6. You don’t need to be part of an accelerator to be successful.
The most dominant success factor in billion dollar market cap companies is that 70 percent of the founders were co-called “super-founders” – founders who with at least one previous exit of more than $50 million. This isn’t surprising. So if you aren’t a super-founder you may well want to apply to an accelerator. See my post Should you join an incubator or accelerator?
This article and the study upon which it is based provides very useful information for both founders and those that mentor them, regardless of whether the intent of the founder is to build a billion dollar market cap company or not.