A Herd of Unicorns

Q: If the unicorn is the rarest creature in the universe, how can there be a herd of them?

A: The Networked Age.

In the venture capital industry, just picking winners is a losing strategy. The goal is to pick blockbusters, companies that can scale from a team of founders in a garage to a multi-billion-dollar IPO in less than a decade. History has shown that it’s primarily these outlying performers that create returns for venture investors, so top-performing fund managers focus on companies that have a shot at growing to this size.

History has also shown that such companies have been extremely rare. To capture that rarity in a single word, Aileen Lee, founder of a seed-stage investment fund called Cowboy Ventures, coined the term "unicorn" in a 2013 Tech Crunch article.

According to Lee’s research, just 39 out of approximately 60,000 U.S.-based software and Internet companies that received venture funding from 2003 through 2013 attained public or private valuations of $1 billion or higher. Lee dubbed them members of the "Unicorn Club." It’s an evocative coinage that quickly achieved currency.

Over the last year or so, however, unicorn sightings have become almost as common as Bigfoot sightings. Fortune, which maintains an online list of unicorns, has identified more than 100 global specimens. CB Insights, a research firm, puts the current global population at over 120.

As the number of unicorns have grown, so has the skepticism about these billion-dollar maybes. "The billion-dollar tech startup was once the stuff of myth, but now they seem to be everywhere, back by a bull market and a new generation of disruptive technology," Fortune noted. "Some say the proliferation of unicorns is a sign of another tech bubble."

Indeed, if the unicorn is by definition the rarest creature in the universe, how can there be a herd of them? Talk about an ontological oxymoron.

Certainly, there’s froth in current valuations. Some of the companies that claim unicorn status today will ultimately reveal themselves as nothing more than a dependable cash cow, or worse, a resting parrot with beautiful plumage.

But investors who believe that the current size of the unicorn herd is proof positive we’re in the midst of a bubble are putting too high a premium on Lee’s coinage.

When Lee introduced her concept, she was describing a specific historical condition. In the ten-year period from 2003 to 2013, just 39 out of approximately 60,000 venture-backed U.S. high-tech companies achieved billion-dollar valuations.

But as the term "unicorn" has caught on, it is no longer being used simply as a descriptor of past performance. It has also acquired an aspect of self-fulfilling prophecy. Unicorns are the universe’s rarest creatures — so if billion-dollar companies are metaphorical unicorns, it follows that only a certain number of them can possibly exist, now and forever.

But while the metaphor may put an implied cap on the number of billion-dollar companies that can credibly exist, VC firms and other investors are betting on technology, not metaphors.  

In 2003, the iPhone didn’t exist. Facebook didn’t exist. There were just 800 million global internet users. Since then, we’ve shifted into what I call the Networked Age – an era defined by unprecedented global connectivity and the massive new opportunities that creates.

 Today, there are 3 billion global Internet users – and counting. With tablets and smartphones, they use the Internet far more often, in far more places than they did just ten years ago. Thanks to the rise of social and professional networks, these users are also far more tightly connected than they were in 2003.

New platforms for instant global interaction exist. Off-the-shelf cloud-computing services that give start-ups capabilities that once would have taken millions of dollars to develop are easily accessible. A variety of easy payments systems are in place. Thanks to these factors, a couple college students can build an application that 100 million users might adopt in a matter of months.

So ultimately it makes perfect sense that more companies are capitalizing on this new environment to build winner-take-most businesses that investors correctly value at a billion dollars or more.

And because the start-up world itself functions as a network, winning ideas and approaches are identified, supported, replicated, and refined with breath-taking speed. In the Networked Age, everything accelerates and amplifies. What was once scarce can become abundant. That’s true for microprocessors, bandwidth, market sizes, and, yes, even billion-dollar companies. A herd of unicorns is a natural consequence of the new world we inhabit, a sign of a healthy, productive ecosystem at work.

This article was originally published here on August 13, 2015