At the GMIC Silicon Valley mobile conference, Mayfield Fund's Tim Chang stunned the audience with a new term: Pegasus. "What do you call unicorns without sustainable business models? Jackasses with paper horns!" he declared, "I think there should be a new term, Pegasus, for a unicorn that has grown its wings and actualized its value."
Fresh from my (very un-unicorn) exit, I had to grab the iconoclast and ask him more about the phenomenon and why entrepreneurs were focusing on the wrong growth metrics. My guess is that Pegasus will soon sit alongside unicorpse as an important new term deflating the unicorn hype.
Hat tip to Monique Woodard for supporting the interview and to GMIC for having me capture the behind the scenes action at the conference.
What is a Pegasus?
We've taken the term unicorn and kind of bastardized it a bit. Applied it to anyone with a private company valuation. Originally it was a term designated for a company that got a realized exit meaning it actually stayed public and was worth a billion dollars or more or was bought for more than a billion dollars.
When we say realized exit, we mean someone actually got a billion dollars worth of value out of this--not just on paper. As a crazy example, if I can get my rich uncle to make me a check for ten dollars at a billion dollar valuation, then theoretically I can go around saying "I'm a unicorn!". It doesn't actually tie to any real reality. Onstage, I was joking that we should use the term Pegasus to describe a unicorn that has actually spread wings and managed to stay afloat.
Why are there so many unicorns right now?
This is our dirty secret: We are all motivated to push our valuations higher and higher. Entrepreneurs do it because it's kind of an ego stroke, "Yeah, I own a billion-dollar company." For investors, a lot of times when you raise your next fund, your marketing momentum and hype. If you don't have actually exits, the best you can do is market and say, "Look, it has a high valuation! On paper, my stake is worth $200 million of that billion dollars." It's all based on incentives we all have to either stroke our ego or try to go raise more money. It doesn't tie to reality. It creates a lot of artificial pressure to get to that billion-dollar valuation by hook or by crook.
By inflating numbers or using metrics that aren't quite kosher.
Exactly. The other downside is that you might be able to find investors that are willing to give you that billion-dollar valuation, but they might stick a ton of strings on it. Like, "If your next round is below a billion, I'm going to get full ratchet protection, deep discounts..." and so on. And people have done that. China was one of the first markets where people got crazy about these headline valuation and the investors got really smart: "Fine, I'll give you a billion. I'll give you two billion! I'll give you whatever you want. But you have to guarantee that I get a 3x to 5x return on the next round off the top. That unsophisticated, ego-driven founder will say "I got a two billion-dollar valuation, but then, when the other shoe dropped, they lost everything and didn't get a penny.
They have to raise money just to stay alive. A good, easy way to differentiate that is, if you stop spending money on marketing and variable costs like fancy catering or in-office massages or whatever, would the lights still stay on since the revenue can handle your natural burn rate? I'll give you an example: Uber, or maybe even companies like Spotify, are in that position, as the core business does make money. It's got profit margins, but it is spending a ton getting new users and doing a land grab.
If the poop really hit the fan and they needed to, Spotify could shut down all the marketing. The subscriptions would still keep rolling in, which would probably cover their staff and audience. You have burn rate driven by variable costs for growth. For instance, some of these food delivery companies and you're selling a dollar for $.90 and it's not covering any of the cost and you have to keep raising bigger and bigger rounds to survive. Those are in the biggest danger of being unicorpses. Homejoy was one of those. That's why we all stress this notion of "unit economics" so much these days.
Do you have any predictions for who will achieve unicorn status and it will be well deserved?
Uber is worth it. I think Air BnB will as well. Pinterest is interesting to watch as they will be getting to a billion in revenue, so could be worth more, but for companies like that which have solid revenues, it's unclear how they can be decacorns or megacorns or whathaveyou, or are they more a "unicorn lite"? Are you three or five billion, or 10 to 20? With Pinterest, I love the company, and I can see them with their first billion in revenue, but how do they get their next billion in revenue? If you're a late-stage investor, you're trying to make at least 2x your money. It's a tougher sell.