If you look at the "basic math," unicorns may be pointing us to a new bubble
Think you have an amazing, incredible, billion-dollar idea for a startup that will completely transform the world and the way we live? Well John Doerr, a self-professed technology junkie who “worships at the altar of ideas and innovation,” has some news for you:
“Ideas are easy. Execution is everything.”
The pithy remark came at the end of an onstage conversation between the legendary Kleiner Perkins Caufield & Byers (KPCB) venture capitalist and Paul Martino (General Partner at Bullpen Capital) at the second annual Post Seed (#postseedconf) event in San Francisco yesterday.
It’s simple but forceful, and in a few words explains why ideas as simple as “online retail” or “on-demand taxis” end up being the basis of massive technology companies (like Amazon or Uber).
In almost an hour of conversation that swung from what makes a worthy Series A investment to innovation in the healthcare industry, we were bound to turn our attention to unicorns and the prospects of another tech crash.
First, Doerr explained the “basic math” of the unicorn problem. Google, he said, has acquired one company a week for the last five years, but there have only been five instances where the company paid more than $1 billion for an acquisition.
Today, there are almost 150 companies considered unicorns, or private companies valued at or above $1 billion. Acknowledging the fact that most companies don’t exit through IPO but rather through acquisition, how is the math going to work out?
When you add to this that nearly 100 of the unicorns are based in the United States (“Americorns,” as we should never ever call them again), then “you expect there’s going to be a great coming disaster” like the dot-com bubble in the 90s.
“But,” he added, “the scale is different,” arguing that the industry today is spending less than it was during the last boom.
Still, the basic math is going to lead somewhere, and massive private valuations aren’t necessarily a good thing for these companies. “Having a $1 billion valuation can be a real problem,” said Doerr. “Being a unicorn is really an albatross.”
In the end, the experienced venture capitalist shared some tangible wisdom with entrepreneurs in the audience. The entrepreneur should set the valuation and the investor will set the terms. But don’t just invent pie-in-the-sky valuations.
“Go for clean terms and let the market set the valuation,” Doerr said. “Don’t choose your investor based on valuation, choose it based on the value you think you’re going to get by hiring that investor.”
Investors are hard to fire. That's why entrepreneurs need to find an investor that will truly be a partner. They're not going to be running the company or setting strategy, but rather supporting you and the direction you want to take. What's most important, ultimately, is that founders and/or CEOs are in charge.