Many Silicon Valley startups that were once valued at $1 billion are now shedding unicorn tears. After going public, the market share of several too-innovative-to-fail unicorns plummeted. Unicorns whose share price dipped dramatically after going public include  Square, Fitbit and  Box. They're not the only ones. The "slain" unicorn has been a hot topic in Silicon Valley these past several months.

The rise and fall of unicorns is especially gossip-worthy because many of these companies didn't even exist five years ago. A $1 billion valuation was once an extremely rare occurrence -- hence the name unicorn. Now there are over  130 private companies valued at $1 billion or more.

When unicorns struggle post IPO, you wonder if they were too highly valued in the first place. That could be part of it. There's a bigger problem though, a more disastrous one.

The biggest factor contributing to the death of any unicorn is the failure to continue to innovate, proposes a new piece on Harvard Business Review co-written by Vijay Govindarajan, Tarunya Govindarajan and Adam Stepinski. That's not to say these companies weren't innovative at one time. But as they grow in size and enter the public marketplace, it becomes more difficult to maintain a culture of innovation. Instead, they become stuck in an endless cycle of fending off competition.

Unfortunately there's a double edged sword to being a disruptor to any marketplace. If your product is disruptive enough, then you will have completely changed the landscape. Other companies will take note and begin to learn, pivot and catch up to your success.

Failure to innovate is a recipe for disaster

Startups have an advantage to decades-old companies that are entrenched in slow-moving bureaucracy and bogged down by their size. Seemingly overnight, a small startup with a wacky-sounding name gets slapped with a $1 billion valuation because they were able to hone in on their big idea and get all hands on deck towards building a single innovative product or service.

That's when things can get dangerous. Once an innovator doesn't mean always an innovator. Once a public company, the disruption phase is over. It's competition phase. Without the focus on innovation, a unicorn faces the same fate as those they disrupted. Improvements can be made on product that brought the company to IPO, but they also need to diversify their offerings to stay relevant and ahead of the game. "Now we're seeing that in the face of strong competition, some of these very same unicorns are struggling not only to keep up, but to keep innovating beyond their first breakthrough," the authors of the Harvard Business Review piece said.

Speed is equally advantageous and a disadvantage

Nimbleness is often on the side of a startup poised for success. The team can iterate quickly and grow fast. Keep in mind the market is moving, evolving and becoming more competitive just as fast. The technology the innovative unicorn was built upon could be old news by the time they IPO.

Harvard Business Review points to Dropbox as a warning tale. Though the company is still privately held, it's facing stiff competition. When Dropbox was founded in 2007, cloud storage was a novel idea. The service boasts an impressive 500 million users and was last valued at $10 billion. Mutual fund T. Rowe Price recently marked down its holdings in Dropbox by 51 percent, Business Insider reported. More specifically, T. Row Price paid $19.10 per Dropbox share when the fund invested in 2014, but now is valuing those same shares for just $9.40.

Dropbox had the mega-growth to earn its spot in the unicorn club. Why the devaluation? Because of the competition from other players in the exact market the company invented. Now, you can store your files and documents on the cloud using services from Apple, Microsoft, Google or Amazon.

Dropbox faces more than fierce competition. Other companies offer a more seamless cloud storage experience on mobile -- which wasn't even around when Dropbox first entered the market. "If your smartphone already comes with a built-in cloud storage option, why spend the time and money on something else? Dropbox should be working on new innovations if it intends to keep up with the big players," the Harvard Business Review piece says.

That's not to say Dropbox is in trouble. If anything, the company is in a better position than unicorns that have gone public because they can still innovate behind closed doors.

Published on: Apr 26, 2016
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