Chasing the Unicorn

About a year ago I got a fairly unusual phone call.  The caller told me he had been an early employee of a company that had started up about 8 years earlier.  He loved the work and the camaraderie of the core group.  He was upset that the company had been sold for several hundred million dollars because the team had always told themselves that the company would become a unicorn; a start-up valued at over $1 billion.  He told me his share of the sale was “only” about $25 million and he wanted to start up a new company so that he could reach that unicorn status.

I have a very different value system than this gentleman. In my mind, if I get to the point where I have $25 million in one place, my first thought would be about walking into the local food bank with a large check.  Values and valuations are what make people chase unicorns.

Unicorns, in case you need to be told, are not real.  When someone says that a business has a “value” of $1 billion or more, it is not real either. It is an accounting trick that is used by Venture Capital (VC) firms to pat themselves on the back.

VC’s are the key to your valuation becoming a unicorn.  You will need multiple financing rounds at ever increasing valuations to get there.

The idea is that if you sell 20% of your company to a VC in Round A for $5 million, then your company’s Unicorn value is $25 million (5x $ 5 million). Of course, assuming it had no other assets, for accounting purposes its book value is closer to the $5 million that you just raised.

If you burn through that $5 million and then sell another 10% of the company for $20 million you have a book value of that $20 million and a Unicorn value of $200 million (10x $20 million). By the “C” round it is usual for the VCs to push the Unicorn value up into the hundreds of millions or higher even if all the company has is the cash it just raised.

What may surprise you is that VCs often have an understanding between themselves: you invest in the “C” round of a firm I am already invested in and I will invest in the “C “round of one of the companies that you have already invested in. That way, the valuation of the early rounds that each is holding will show a paper profit, making the VCs’ investors very happy.

There is another value that accountants assign to companies that may help to illustrate the problem; replacement value.  It is the cost of starting a competing company from scratch.

The best example might be Uber which has a Unicorn value of $65 billion. The company is essentially an app and a lot of independent drivers. I am confident that anyone could develop a competing app for less than $10 million. If they pay their drivers a little more per ride Uber’s drivers will jump ship.  If you start slowly and run the company lean, you could actually make a profit which is something Uber cannot seem to do.  But you will never be a Unicorn.

Remember that the Unicorn value has nothing to do with running your business profitably.  It is all about VCs and their perception of you. What they care about most is that you tell a great story that will make them look good.

If you are interested here are 12 steps to help you achieve Unicorn status:

1)  Never approach a VC directly. Always find someone who can introduce you to a VC.  The founder of another company that the VC has funded is best.  In a pinch the VC’s frat brother will do.

2) Learn to pitch the VC correctly. Never use words like bottom line or profitable. Focus on growth and market share.  Tell the VC why every human being on earth will buy what you are selling every day.

3) Never, ever wear a necktie to pitch to a VC.  It is a sign of disrespect. Always wear a wrinkled tee-shirt or a hoodie. It is fine if there is dog hair on it, but never cat hair. Your company’s logo on the shirt is best. If it is a tech company a picture of Alan Turing will work. Use a picture of Michael Palin if it is a consumer goods company.  In a pinch you can have your college logo on the tee shirt as long as it is Stamford, MIT or NYU.  If you went to a state university, default to Michael Palin.

4)  Never discuss competitors with a VC even if your main competitor is a Fortune 500 company. Remind the VC that you have no competition because you are light-years ahead of everyone else and that if you had competition you would crush it.  If the VC is really concerned about this; tell them that in the worst case, if some competitor comes out of the woodwork that you can’t crush, the VC can always give you enough money to buy it.  After funding, always respond that you are closer to market with your product which is demonstrably better than the competitors, even if your product is way behind schedule and will cost more and do less.

5) Once you are funded, focus on selling your product even if it is not ready for market or for that matter does not exist. Sign “strategic partnerships” with other start-ups or with existing companies in need of a shot in the arm from new tech.  Remember, promising a product roll-out or a delivery date is just a promise.  It is like telling your kids that you will start spending more time at home.

6) Good “PR” is everything. Start talking about your IPO very early on.  Appear at conferences on panels with other start-up superstars. Do a Ted Talk.Tweet a lot. Support popular causes like saving trees or creating a gluten free America with a big check and a big press release. Remember that it is the VC’s money that you are giving away, so be generous.

7) Create a corporate culture that fits your personality even if you are a schmuck. Do not be afraid to yell and scream or call employees at 3AM with questions you could ask the next morning or just to brainstorm on something you know is not important. Employees will not love or respect you, so fear is everything.

8) Treat the company insiders, the bros you need, to stock options with long vesting schedules, just in case they decide to jump ship.  Make them sign ironclad NDAs. Do not be afraid to stab them in the back. They would do the same to you in a heartbeat.

9) Treat everyone else at the company like they do not matter, which they don’t. Make them work long hours for minimal pay. Remember that a cappuccino machine in the employee lounge is cheaper than good healthcare insurance. Promise them bonuses when the company goes public. Always remind them that the company is a team effort and you could not do it without them. If they complain tell them that they do not share your vision for the company and should move on. If they will not move on, replace them. Nobody likes complainers.

10) Remember that rules and regulations do not apply to you. That includes rules about wages and hours, discrimination in hiring and conduct in the workplace. You do not need to apply for a permit if you want to modify your office space or any other type of permit to operate your business. Rules and permits are for legacy companies. Do not test your products for safety or your data storage for hackability. That is what insurance is for.

11)  If you get called before Congress to testify make sure that you look at them with disgust.  Tell them that they are old and do not understand new technology or your business model. You can admit that you made mistakes and promise to do better in the future. It does not matter.  By “do better in the future” they will understand that you will make a fat campaign contribution the next time they run for office.

12) Change your LinkedIn profile to “Visionary”.

And remember that unicorns are for children. If you are still chasing them it means that you have yet to grow up.


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