You've likely heard the term "unicorn" many times. It refers to a startup with a valuation of $1 billion or more. You get it--unicorns are rare, or at least used to be before the current venture capital craze. And, like unicorns, those valuations could be mythical. But where did the term come from in the first place?

At the recent GeekWire Summit in Seattle, I learned the answer to this question from the source, VC Aileen Lee, who founded Cowboy Ventures in 2012, after more than a decade as a partner at Kleiner Perkins. The following year, she decided to write a report about software startups that were less than 10 years old and were valued at $1 billion or more by the markets, acquirers, or private investors. 

Her first observation was that these highly successful startups were exceedingly rare--only .07 percent of venture-backed startups reached that rarified valuation in a decade or less. But she struggled with what to call them. "I had a place-holder in the blog post for public or private companies less than 10 years old and worth over $1 billion," Lee said, during a presentation titled "The VC View." 

She considered several other possible names, including "home run" or "mega hit" companies. "But then I put 'unicorn' in and it all fit," she said. "I wanted to convey rarity and alchemy. It all read so much better." 

Lee's purpose in creating the report was to see whether there were any discernible patterns to which founders were able to create unicorns. It's interesting to consider the assumption underlying her research: She was looking for similarities among the people who founded $1 billion startups, not for similarities between the startups themselves. She seems to agree with the often-repeated VC view that you should make your bet on the person founding a company rather than on the company or the idea behind it. 

Here's some of what she learned: 

1. The college dropout as unicorn founder is a myth.

Bill Gates and Mark Zuckerberg each quit Harvard after a couple of years to found what became giant companies. But the image of the twenty-something college dropout as unicorn founder does not reflect the norm, according to Lee's research. Of the 39 unicorns she identified that were founded between 2003 and 2013, most were not launched by people in their 20s. In fact, the average age at which people founded unicorns was 34.

"Yes, the founders of Facebook were on average 20 when it was founded; but the founders of LinkedIn, the second most valuable company on our list, were 36 on average; and the founders of Workday, the third most valuable, were 52 years old on average."

2. It's better not to go it alone.

Popular culture portrays unicorn founders as eccentrics working alone, but that's inaccurate in the overwhelming majority of cases. Of the 39 unicorns on Lee's list, 35 had more than one founder. In fact, the unicorns had three co-founders on average. Most of them had something else you might not expect--a long history of working together. Ninety percent of the co-founder teams from the unicorns Lee looked at had known each other for years, at school, at work, or sometimes both. 

It's especially helpful if at least one founder has been there before. Eighty percent of the unicorns had at least one founder who had already founded a company, in some cases in high school or even earlier. Not all of these were software companies--one was a bagel delivery business--and not all of them were successful, which tends to support the view that you learn a lot from failure. And 37 of the 39 companies had at least one founder with experience working at a tech company.

3. Elite schools really do pump out unicorns.

This may be the only myth about unicorn founders that held true in Lee's research. The vast majority of unicorn founders had been to top-tier college. As you might expect, Stanford produced the most unicorns--one third of them had at least one Stanford alum as a founder. Harvard ranked next, with grads (or dropouts) founding eight of the unicorns. Five companies had founders from UC Berkeley, and four had founders from MIT. Eight of the companies had at least one college dropout as a founder, although (with the famous exception of Mark Zuckerberg) they had all worked at tech companies before founding their unicorns.

Lee was careful to emphasize that these companies are very much outliers and her research should not be used to construct a "unicorn-hunting investor checklist." As in: "34-year-old male ex-PayPal-ers with Stanford degrees, one who founded a software startup in junior high, where should we sign?" Although she didn't address this question, it's worth wondering whether the high number of Stanford, Harvard, Berkeley, and MIT students among startup founders could be a self-fulfilling prophecy--that is, VCs tend to favor graduates or even former students of these schools and without meaningful rounds of VC investment you just can't grow fast enough to get to a $1 billion valuation in 10 years.

She was also concerned about something that's an even more of an issue now: Go (ridiculously) big or go home has become way too much of a watchword among startup founders and VC partners. Even back in 2013, when Lee wrote the report, she noted that VCs were desperately seeking unicorns because of the combination of two factors. First, most VCs lose the vast majority of their bets, but make their returns on one or two big winners. But because VC investment funds had grown so huge, they now needed those to be really humongous winners. "For example--to return just the initial capital of a $400 million venture fund, that might mean needing to own 20 percent of two different $1 billion companies, or 20 percent of a $2 billion company when the company is acquired or goes public," she explained.

Now, of course, things are even more out of whack. "It used to be all startups had $4 million and competed with each other," she said at the GeekWire event. "Now I've heard someone say they wouldn't even write about your fundraise unless it's $100 million or more." 

Numbers like these are one reason it's even more important to get beyond the traditional Silicon Valley VC formula and support founders who aren't thirty-something males who went to Stanford or Harvard. Which is one reason Lee and 33 other female VCs got together to create All Raise last year. It's a non-profit whose goals include doubling the number of female partners at U.S. venture firms from 9 percent to 18 percent in the next 10 years; and increasing the percentage of VC money going to startups with a female founder from 15 percent to 25 percent.

Lee noted in her original report that only two of the unicorns had any female founders at all, and none had a female founding CEO. Maybe next time she runs the numbers, things will be better.

Published on: Oct 25, 2018
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