Moving Beyond The Unicorn Chase

Moving Beyond the Unicorn Chase in the Innovation Ecosystem

Brian Bell, CEO/Founder Compass Innovation Advisors

The chase for the “unicorn” - startups just cost $27.2 billion (USD). This staggering figure is according to data compiled by PitchBook for The New York Times. It reports that 3,200 start-ups backed by private venture have gone bust. PitchBook also stated that this number is likely much higher as not all businesses announce their demise. Brace for more unicorn carcasses along the path of overhyped hope. https://www.nytimes.com/2023/12/07/technology/tech-startups-collapse.html)

I am a passionate advocate for start-ups, entrepreneurship, and innovation. But chasing unicorns is a tired model. Massive failure like we are currently seeing should not be accepted as normal. Fund managers who find this normal, maybe shouldn’t be fund managers.

The billions invested in these failed ventures could have been more effectively used to foster sustainable businesses, which not only is much more promising and offers stable returns, but also contribute positively to the economy and our local communities. We need a shift our collective mindset from merely providing capital to actively enabling innovation. Isn’t it more beneficial to see 10 new jobs created from 100 sustainable business chasing unicorn with the potential of creating 1000 jobs?

So, what’s problem? There’s plenty of blame on both sides of this unstable dynamic. Below is a 5-Why approach of examining the problem.

Why do many VCs invest in start-ups that fail?

• Why? VCs might invest in startups that haven’t demonstrated a sustainable or scalable business model because they are attracted to innovative ideas or potential high returns.

• Why? There is intense competition among VCs to find promising startups early, which leads to rushed decisions without thorough due diligence.

• Why? The VC industry operates on a "hit or miss" model where a few big successes can offset many failures. VCs bet (speculate) on those startups hoping some will yield high returns.

• Why? Investment is still seen as high-risk, high-reward. VCs often (usually) rely on market trends and whispers, relationship with the founder, and often, their intuition instead of validation.

• Why? Startups often lack any kind of performance data, making it challenging to make well-informed investment decisions based solely on traditional business metrics. VCs then lean on trends, founder’s enthusiasm, and yes, hope.

Why to many businesses backed by VCs fail?

• Why? Startups often fail due to a lack of market need for their product or service. Solutions looking for problems never work.

• Why? Startups might not conduct adequate market research or may misinterpret market signals, leading to products that customer don’t need or want.

• Why? Usually, a combination of factors such as overconfidence in the product concept, lack of experience in the target market, or failure to engage with potential customers for validation and feedback.

• Why? Many startup founders often have a strong emotional attachment to their product idea, which can cloud their judgment. Additionally, they might lack experience in pivoting based on market feedback.

• Why? This can stem from a culture in the startup ecosystem that sometimes values bold visions and disruptive ideas over practical market fit. Also, there might be a lack of mentorship or guidance for new entrepreneurs on how to adapt to market realities or create a culture that can thrive.

When the bold overshadows the practical, and hope overshadows diligence – the expectant unicorn doesn’t materialize. Those failures are much more that lost money. People’s lives are disrupted. Their well-being is impacted and their families are thrown into chaos. Business support services take a hit, and the ripple (or tsunami) is felt throughout the innovation ecosystem.

Solving the problem is not hard. Stop chasing unicorns! Early investment is better used for market validation. That’s it. We don’t need overhyped business plans and pitch decks with lofty projections. We need a validation plan that will demonstrate that customers want your unicorn poo. The emotional attachment to the charismatic founder or a market trend is part of human nature, but a validation gate needs to be in place to avoid crossing into the pasture of despair. Long-term, sustainable incremental gains should be target. Investment in innovation tools and approaches should be part of any investment to encourage a culture of innovation. Investing in all the people involved, not simply the founder cultivates thriving business.

Communities and investors who focus their resources on growing existing businesses with real customers, upskilling the workforce, transferring innovation knowledge across their business ecosystems, and investing in promising startups with a validation-first approach, are more likely to build prosperous and sustainable communities.

The message is clear: stop chasing high-risk unicorns and foster sustainable business through market validation and long-term investment strategies.

As an Innovation Advisor, I work with several start-ups and early-stage companies where validation is the most important deliverable for the business and potential investors. Once achieved, those companies earn the right to move to the next stage of their innovation journey.