The term “unicorns,” coined, in 2013, by Aileen Lee, founder of Cowboy Ventures, is commonly used to identify venture-backed private companies valued at $1 billion or more. As of February 2016, the top 10 unicorns for market capitalization are: Uber, Xiaomi, Airbnb, Palantir, Meituan-Dianping, Snapchat, Didi Kuaidi, Flipkart, and SpaceX. A complete list of unicorns is published by The Wall Street Journal; as of February 2016, it includes a total of 146 companies.
Unicorns have become widely studied and very popular in business press. In particular, much has been written around the key questions of whether their worth is anywhere near their valuations and why they are reluctant to go public. However, by simply celebrating the success stories of unicorns or quibbling with their valuation numbers, we risk ignoring the important question: How did they get to be so valuable?
At one level, the answer is quite obvious: Unicorns get big fast. As a result, they enjoy the very steep growth rates of the businesses they’re in. Think about Uber, created in 2009, which is now available in over 400 cities worldwide, fulfills over one million rides on a daily basis, has about 9 million users, and receives more than $1 billion in payments per year. Snapchat, an idea conceived in 2011, is now valued around $16 billion, with more than 100 million active users who send an average of over 400 million snaps per day. A third example is Airbnb, now valued at $25.5 billion, which has experienced incredible growth, with the total number of users having practically doubled each year since 2012. HelloFresh has also had impressive growth rates, with revenues reaching about $300 million in 2015, a huge increase from its $3 million in 2012.
But is there something about these specific companies that others can learn? To answer that deeper question, we carried out a systematic analysis of the 146 unicorns identified by The Wall Street Journal. Thanks to this analysis, we identified four features that are common to pretty much all the unicorns and which we believe helps explain why they have been so successful. Unicorns are:
Small in size. Until 2014, Uber had fewer than 500 employees; today their headcount is around 3,000 people. Palantir, a B2B company founded in 2004 and offering a suite of software applications for integrating, visualizing, and analysing data, has around 1,500 employees worldwide and is valued around $20 billion today. Pinterest, at the end of 2012, had about 100 employees with 40 million users, and this made it the largest social media platform in by number of users per employee. The small size of unicorns allows the top management teams to be directly and deeply involved in most of the strategic decisions, which are then implemented through a flat organization. This is makes it easier to take decisions and put them into practice very swiftly.
Led by serial entrepreneurs. Unicorns are often founded and led by serial entrepreneurs, who have experienced business failures several times in their professional lives. For instance, Snapchat’s cofounders, Evan Spiegel and Bobby Murphy, started working together on a website for students called Future Freshman, among other projects, while at Stanford University. They attempted nearly 34 projects that failed before developing an iPhone app called Picaboo, which was subsequently rebranded as Snapchat. Similarly, Apoorva Mehta, a former Amazon engineer and founder of Instacart, now valued at $2 billion, tried up to 20 different business models that failed before hitting the right one. Anthony Soohoo, one of the cofounders of Dot & Bo, once said, “Initially, each idea and mock-up we developed for the company was completely and utterly wrong. During the first five months of building the company, we essentially failed every single day….However, embracing those struggles redefined our vision of moving beyond a company that sold furniture, to creating a brand that would inspire and enable people to create their dream living spaces.…If failure is the prerequisite of success, businesses can no longer afford not to encourage risk taking. At Dot & Bo, we believe in launching projects quickly and iterating rapidly on those that show signs of success, while acknowledging initiatives that fall flat.” The history of the founders and entrepreneurs behind unicorns is therefore rich in failures; this allows them to instill in their companies a culture that emphasises the importance of anticipating the constraints behind an innovative idea as fast as possible by testing its viability.
Financed by VC firms. Uber alone has raised more than $10 billion from VCs and similar financial backers to date. Airbnb has raised approximately $2.3 billion so far, while Snapchat has raised $1.2 billion. Meituan-Dianping is the dominant Chinese internet player in restaurant booking, movie ticketing, and other services. Founded in 2015 and now valued more than $18 billion, it raised $3.3 billion in a single round of equity financing, the largest private fundraising round for a VC-backed startup ever. Similarly, Flipkart, the largest online retailer in India, has so far raised an impressive amount of around $3 billion in nine rounds of equity financing. The strong presence of VCs among unicorns’ shareholders creates enormous pressures to build successful new businesses very quickly, and with an eye to an exit. It is unlikely that firms with different ownership structures, such as publicly listed companies, will be as fast as unicorns in creating their innovations and in bringing them to market.
Narrowly focused. All Airbnb does is offer a connection between home and flat owners with rooms to rent to people looking for a lower-priced alternative to hotels. Similarly, Palantir has built its business around a single software application that performs link analysis, by presenting in a catchy visual manner the relationships existing between any type of data, such as phone numbers or bank records. This laser-like focus implies a commitment from the top management team and prevents the risk of scattering managerial attention among different strategic challenges. Moreover, the innovations lying at the heart of the unicorns’ success stories are digital innovations. By leveraging on pervasive digital platforms and social networks as channels through which they enter the market and reach their target customers, digital innovations require smaller efforts and investments in marketing and commercialization than traditional products or services do, and they can be diffused much faster.
In a nutshell, our analysis indicates several things about unicorns: They have a sharply focused and experienced leadership; their business model is built around a single digital platform or software that is very quick and cheap to develop and leverage; they do not need to invest in building a big workforce and lots of assets; they are backed by financiers motivated for a quick sale; and they are willing to kill or pump in more money on short notice. Culture, incentives, and needs are all geared toward speed; what unicorns really embody are businesses optimized to bring specific digital innovations to markets really, really fast. To be sure, there are also plenty of failures. But the hyper-fast cycle times of the digital world mean that these entrepreneurs and the VCs backing them get to fail faster than they did before, which helps them reach the promised land more quickly.
We call this unique approach adopted by unicorns lightning innovation — and large companies such as Microsoft, Apple, and Cisco should be able to benefit greatly from applying it. After all, lightning innovation delivers fairly immediate returns, does not entail high levels of technical risks, is targeted at very clear and large markets, does not fall outside their current businesses or areas of strategic action, and typically outperforms existing products or services.
But to realize this potential, established companies will need to fundamentally revisit their business models and cultures. Some of the big players do seem to recognize this — it may be one of Google’s motivations for creating its Alphabet structure, in 2015, splitting itself into smaller and more agile units. In a digital world, learning to fail fast is the key to getting big fast, and we can expect the big, structured companies of today to take a leaf from Google’s book and start to turn themselves into portfolios of unicorns.
Editor’s Note: An earlier version of this article incorrectly attributed quoted material from Anthony Soohoo to Brian Chesky. It has since been corrected.
Alfredo De Massis is a professor of entrepreneurship and family business at Lancaster University’s Management School in England and Director of the School’s Centre for Family Business
Federico Frattini is a professor at the School of Management of Politecnico di Milano in Italy, where he is also Director of the MBA and executive MBA programs
Franco Quillico is Managing Partner of Andromeda Consulting, and he advises corporate clients on business strategy, with a particular focus on M&A. He is also an adjunct professor of strategy and finance at the School of Management of the Polytechnic of Milan in Italy.