The unicorns are coming. Everything about startups and
the venture capital industry has become about startups valued at $1 billion or
more – even for companies that may not generate close to any revenue at all.
Those in my industry, “VCs”, know that unicorns are rare.
Yet, like the Holy Grail, everyone is in hot pursuit of it. Arguably, VCs refer
to these companies as unicorns because they are rare (although table below suggests
that they are not as rare as the actual four legged unicorns).
Why a unicorn and not a Pegasus? In my limited knowledge of
mystical creatures, Pegasus is not only a god but a much rarer and in my
opinion far cooler. It has wings and can fly! I am still not sure what a
unicorn does except possibly having the ability to impale its rider.
But, what really defines the success of a VC?
1. ARE VCs RIGHT TO CHASE UNICORNS?
I have a few issues with VC industry’s obsession with
unicorns. Unicorns, as VCs understand them, mostly exist among companies that disrupt
the market place (such Uber, Airbnb and the like) but with few notable exceptions
do not get their market traction from innovative new technologies. Second, I am
concerned about these huge valuations that prompts other VCs to throw money at
the next unicorn thus creating a considerable bubble. It is never good for the
market when a bubble bursts. Third, a unicorn reflects the vision and
investment strategy of Silicon Valley focused funds (or those with similar
vision) and takes away the attention from investment activities targeting hard
core technology creation. Finally, when such numbers ranging from 1 billion to
20 billion fly around, I am concerned that we are all losing sight on what is
the purpose and actual success of a VC. Are we a successful VC when the company
we invested in reaches these numbers or when the company goes IPO and market
verifies the valuation? Not to mention how sustainable the companies eventually
become while being traded in open market? Are they going to be stable and stay
in business for a long time, will they show ability to change, adapt and keep
innovating to survive technology and market shifts? [2]
Obviously, for a VC success is an investment in a company
that reaches big valuations, especially if you are an early stage investor and
manage an exit (monetize your investment) when following rounds of investments
come in. It is true that a VC’s primary fiduciary responsibility is towards its
investors. But as VCs are an important
clog in the machine of taking technologies to the market, we have a long term
vested interest in creating value for the entrepreneurs, the society at large
and other VCs.
A VCs mission should be win, win, win (W3).
- Win for the fund
- Win for the entrepreneur; and
- Win for society.
A VCs success should be measured not only in ROI (return on
investment) but also on the cool stories they have authored with the
entrepreneur. No doubt, some of the big boys in the VC industry have managed
that, and we are grateful.
One particular issue I have is that we hear so much about Uber,
Airbnb, Pinterest but rarely about a startup in the biotech or medical spaces –
a startup focused on groundbreaking, life-changing innovations.
2. BEING A VC: INVESTING IN KNOWLEDGE vs. BUSINESS MODEL
So what do I do for a living?
I am also a VC. And, I would love to have unicorn in my barn,
stable, whatever. But, I am not a unicorn hunter. It is not because I don’t
believe in unicorns.
Some suggest that the geography where my fund is focused
(Turkey) cannot generate a unicorn anytime soon. I don’t believe that. I refuse
to believe that good ideas, nay great ideas such as Uber will only come from
the Valley with few exceptions such as Skype and Xiaomi merely confirming the
rule. I have had the pleasure of having early access to a great book written by
Elmira Bayrasli “From the Other
Side of the World: Extraordinary Entrepreneurs, Unlikely Places”
(to be released on September 8th, 2015) where she proposes that new
ideas are universal and next great idea is as likely to come from Pakistan and
not from San Francisco. In a global world, with ever-growing access to
information, funding and markets, it would be ridiculous to assume that human
ingenuity, drive and intelligence is
limited to few lucky geographic areas[3].
I am not a unicorn hunter because I like to think of
myself a realist. Our fund, Diffusion Capital Partners (“DCP”) is a relatively small fund (30 Million
Euros). Having raised our first fund, thus we lack the war stories that veteran
venture capitalists do. Actual field experience is obviously important to
quickly spot the right deal, the promising technology, and the team to drive
the startup.
Our focus is on early stage startups – and on those
startups focused on true, groundbreaking innovations. Hence, my partners and I
spend a lot of time at universities and research institutions. We are
interested in individuals working on a given technology that can be commercialized.
Finally, our investment criterion is investing in
pure technology that has a form of IP protection (ideally patents) where our
spinouts have a competitive advantage because they have access to great
technology as opposed to a strong market / user basis. With such a mandate, even if I had access to
a time machine, I still could not, even if I wanted to, go back in time and be
one of the early investors of one of today’s unicorns.
Going with the equestrian theme, DCP is not looking
for unicorns. Rather we are looking for a good horse and a good rider.
With regards to the horse, we are hoping to identify
pure breed while still a foal (baby horse) make sure it has the required
physical capacities for the purpose it is indented for. I.e. We would like to
invest in an Arabian for endurance if we feel that being stout, and short is
more important that being a tall and fast animal. Conversely, if feel that
market needs a sprinter, we would be hoping to invest in an English horse.
We will need the rider to be qualified and have the
required skills to ride the animal through the dangerous and hazard filled
journey that every startup has to go through. In our world where most
entrepreneur candidates tend to come from academia, finding the right rider is
often harder than finding the right horse.
So what do we do? We go to universities with proven
record of cutting edge research. We look at what they have, we talk with
researchers in effort to ascertain their drive to take the technology to the
market. We then try to identify the best business model, sometimes intervene in
the patent application process, conduct a technical and market due diligence,
create a road map and hope that the entrepreneur has the will to take it
forward. This last bit is often about motivating the entrepreneur, add new
members to the team and sometimes considerable hand holding. There is a quite
bit of upstream work in what we do.
Our goal? Obviously to maximize the RoI for our
investors. But we also want to create great stories. Not stories full of
unicorns, griffins and knights battling dragons but stories of success, a great
product that helps people that wouldn’t be in the market but for our
investment, something that creates impact and motivates others to try their
hand in this very difficult game that technology entrepreneurship can be, a
story that we can tell our future investors and to our children a like.
Basically, a story that we can be proud to claim co-author credit with out
entrepreneur.
So we will stay on this realm and not cross over to
tolkienesque parallel universe looking for mystical horses. You will find us,
proudly, on the filed, in the stable, grooming and hauling hay.
[1]
Source: Economist
[2]
Read this great article by Andrew
Chen: http://andrewchen.co/why-we-should-aim-to-build-a-forever-company-not-just-a-unicorn/
[3]
Note that Flipkart with USD 15 billion valuation is an Indian Company and Xiaomi
is a Chinese company that creates hardware. Both in top 10 unicorn list.
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