The pace of growth of unicorns, those startups with more than $1 billion in valuation, is astonishing. Even without much to show in revenue, these companies are hits among investors and they sometimes build strong businesses. And quite often they don't.

They succeed, and fail, for a mix of reasons. Sometimes they have a good idea and sometimes investors figure the companies will last long enough so the people who bankrolled the concepts can offload their shares and hit it rich. Sometimes someone hits the big time quickly and more often success comes from years of work. Sometimes difficulties never cease. (Pandora still struggles after 15 years.)

For good or bad, there are lessons that any entrepreneur can learn. Here are seven of them.

Build a story

We are creatures who live by and for stories. We reinterpret facts to fit existing mental frameworks, as cognitive scientists have found. (Or anyone who has tried a strictly fact-based argument with a political partisan.) People want to see their beliefs and shared myths borne out. Unicorns tend to have a story that fits the expectations of mythos. It's the upstarts who, with pluck and hard work, reinvent some aspect of life for the betterment of all. When you talk about your company and what it does, try to find language that lets you cast what it actually is in a form that lets people understand through their mental frameworks. Tell a story that emotionally resonates -- so long as you keep honest. Try twisting the truth and you'll find that eventually that either things come back to haunt you or you have to spend a lot of time and energy reinforcing the message in a hope that you can overcome growing public perception.

Be wary of cut-price business

One of the approaches that many unicorns have undertaken is offering cut-rate prices -- or, as VC Fred Wilson correctly writes, they operate under negative gross margins. In other words, they're selling for less than their cost to hook users. They hope that one of three things will happen: all their competition will go out of business; they'll finally grow large enough so that their marginal costs drop, making the service or product profitable; or they'll have a devoted customer base that will be happy to pay more. But, as Wilson wrote, "taking prices up, or using your volume to drive costs down, in order to get to positive gross margins is a lot harder than most people think." Maybe you'll be the exception and pull it off, but probably not.

Profits matter

This is related to the previous point. There's a continuing hangover from the dot com days, in which too many entrepreneurs and investors still focus on growing market share and worry about actually making money late. It's never too early for concern about profits. Even if you need to run in the red for some time to get a business going, getting to profit should be a concern. When you're profitable and not overly burning your cash, investors can't so easily shut you down because they lose faith or even get distracted by something else and so cease providing capital. You also don't suddenly surprise customers when rates jump, even if you have added all those fancy new features that most of them don't use. Customers come first, but profit mechanisms are part of the foundation.

Investors look at the future

It's not just where you are today, but where you can be tomorrow. Growth has become an expectation of many and investors in particular, because they want to put in money, see growth make their share of the business worth more, and then exit, reaping the profits. However, you also have to balance the sustainability of your company. High growth expectations could demand operational approaches that can't last in the long run. Don't get so hungry for investment that you make disastrous choices. In other words, don't do something stupid because investors want it.

Work out the ownership fight up front

Infighting is ugly, and it gets worse when it's public. Look at the fight over Snapchat's origins, when an ousted founder claimed to have brought far more to the product than the company wanted to admit. There was ultimately a settlement that may have been massive. Or look at the Winklevoss twins who got a settlement from Facebook in the form of a whole lot of stock. It's easier and better to solve issues early on rather than telling yourself you can muscle someone out of the way.

Adulation can turn into acid in a second

Look at Theranos, a startup with all the right story angles: young and attractive Stanford dropout starts a company to revolutionize healthcare with incredibly efficient and cheap blood tests. Except the Wall Street Journal came out with stories questioning whether Theranos was all it claimed. Now the company's CEO is trying to hit back, and maybe the Journal's report is completely flawed. But then, maybe it isn't. In either case, the company's reputation has taken a huge hit. Or look back at the early days of Groupon and then the scrutiny that hit once its financials were pubic. Don't assume that you'll always be beloved of the world. You need the fundamentals to work. Charm has its limits. If you do get public attention and interest, just tell yourself this, too, shall pass.

The law of big numbers is against you

Most companies don't hit the unicorn list, and many of the unicorns won't make it. Venture capitalists reportedly have dying unicorn lists. These are the high flyers that are like a flock of Icaruses. Their wax wings will melt. Put everything into ensuring that your business runs soundly, has strong relationships with customers, and includes people with the management skills that are necessary for long-term success, even if you aren't the one who has them.

Published on: Oct 22, 2015