In the world of innovative businesses everything revolves around a single dream: the desire to become Unicorns, startups with valuations of at least a billion dollars not listed on the stock exchange, which often burst onto the scene of the tech ecosystem with bold stories, “crazy” bets and bizarre personalities of the founders. Stories accompanied (also) by an inevitable dose of luck: being in the right place, at the right time, with the right solution.
Now, although Unicorns in the world of innovation create great attraction and hype around them for the sexy and fascinating aspects of madness, risk and rebellious personalities, it is equally true that there are key elements: concrete and strategic, which contributed to building success “out of the box” of these companies.
Understanding what these decisive elements are and how they can be replicated is crucial for the founders of other startups, so that they can copy their successful model. With the’objective of attracting the most coveted Venture Capitalists (VCs), in the constant eagerness to raise new capital to achieve the coveted Unicorn status.
Second a research conducted by McKinseyout of an interviewed sample of around one hundred VCs and angel investors, what really matters in building the long-term success of a startup (potential unicorn), are the fifth T: Team, Total Addressable Market (TAM), Timing, Technology, Traction. Winning elements always and in any case, which the VC looks at with interest when examining the potential of a startup in which he intends to invest.
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The 5 Ts of Venture Capitalists to become a Unicorn
The unicorn is a legendary animal, with whose image the concept of rarity, strength and imagination is associated. For this reason, the so-called unicorn startups are to be considered rarities, being highly performing companies in a very short period of time.
For an innovative company to reach $1 billion in valuation is quite difficult: according to estimates, a startup has only a 0.000006% chance of becoming a unicorn, that is, we are talking about 2 companies out of 5 million, with an average of 7 years. In this regard, there are some essential lessons that can be provided to startups in the quest to become the coveted Unicorns. Let’s start from the Venture Capitalists’ lesson of the five Ts: Team, Total Addressable Market (TAM), Timing, Technology, Traction. Essential elements for a startup to learn to scale quickly.
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1st T: Team (the Team). Do you have experience and a good network?
Invest in people, not businesses. This is the first mantra of VCs, but in what kind of people and in what kind of team?
- The nonconformist and the rebel wins over everything. First. Second, the vast majority of successful scaleups (around 75%) were started by two to three people.
- Teams made up of diverse founders are the best. Complementary skills are the key to a winning team. The perfect mix includes: skills in technology (around 40% of founders), natural sciences (around 25%) and aptitude for business and finance (around 25%).
- College education is still (very) important. The majority of the founders of the top 100 unicorns in the world have an academic degree (over 95%) and more than 70% have specializations such as a master’s degree, an MBA or a PhD.
With education, important networks are born. And it is interesting to note that more than 70% of the co-founders attended the same university before building their successful startup together. - (Business) experience is essential. It’s rare for founders to create a successful startup the first time. More than 80% of founders had work experience before creating their successful company. And often, more than half had already founded a business before.
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2nd T: TAM, i.e. Total Addressable Market (the total market for a product or service): is it big enough to be worth it?
The VC, to finance a new business, wants to know if the investment can become large enough to be worth it. The evaluation, in this case, is based on two essential aspects:
- (Market) size matters. The sectors that “pull the most” have the greatest number of successful scaleups. There are three sectors with annual revenues exceeding $5 trillion: technology, media and telecommunications; industrial activity; healthcare: These sectors represent almost a third of the top 100 unicorns in the world. Playing in a sufficiently large market, therefore, improves a company’s chances of hitting the target. It is equally true, however, that anticipating market trends can also prove to be a real opportunity. One such trend is sustainability, in which governments and businesses are expected to invest nearly $10 trillion per year for the next 30 years. With areas of investment ranging from green transport to decarbonisation. It is quite predictable that the next new unicorns will in fact be in the climate economy.
A separate case is the artificial intelligence segment which until last year represented a 5% slice of the market, and which in the space of a few months has monopolized attention on the innovation scene and attracted investments not only from the most attentive VCs, but also from big tech companies. - There is a clear growth opportunity. A fairly large market is at stake on the table. It is essential that the market offers significant growth potential for newcomers as well. To determine whether a market is “crackable,” VCs typically evaluate whether there is an opportunity for a product or service to take advantage of a market weakness. Strong fragmentation is an example of such a weakness: if that sector has many players and no leaders, at that point it may be interesting to invest.
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3rd T. Timing: is it too late, is it too early or is it the right time?
They say that in theatre, timing is everything. Well, this also applies to investments in startups:
- True leaders anticipate trends and capitalize on early moves. Having a nose for new trends and identifying their impact early on allows “first mover” to be able to jump into that industry and build a strong position, which typically translates into higher margins and faster growth for the company. For this reason, startups, which anticipate trends, benefit from greater availability of capital and more attractive valuations. As pioneers in the climate market, for example, sustainable brands and companies with a strong climate focus show faster growth, with a valuation two to five times higher than average.
- The startup operates in a two to three year window. VCs are looking for that point they call “Goldilocks.” Point at which a company is neither too far ahead of the market that it risks dying before it has enough customers, nor too far behind that it loses its market opportunity to competitors. VCs aim to invest in startups where the product or service not only works, but also has early indicators of market interest. The VCs’ expectation is that the (identified) startups will move along the innovation curve within two, maximum three years. In line with this point, the maximum amount of capital raised generally supports a run rate about two and a half years.
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4th T. Technology: is it scalable?
For VCs, technology is the key element of a company’s ability to scale:
- The software is (more) scalable. VC investorsqWhen evaluating scalability potential, they typically want to confirm a company’s ability to operate efficiently and stably with millions of customers and thousands of employees while growing at a rapid pace. For this reason they prefer software to hardware, which has complex logistical, maintenance and development profiles. Software, on the other hand, can scale almost instantly if it is well built and supported.
This logic has pushed Enpal, one of the main European players in the green tech sector with a value of over 1 billion dollars, for example, to invest in a completely online purchasing model and develop an operating system and an app that allow customers customers to manage solar panels, heat pumps and other products, all in one solution. Similarly, Infarm, the world’s largest urban vertical farming network, started with a strong focus on hardware but then shifted its focus to software. - The technology foundations support scalability. Some VCs have experienced technology teams dedicated to reviewing and evaluating a startup’s technology profile and ensuring it is scalable. They are looking, for example, for high levels of automation so that costs do not increase as revenues increase.
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5th T. Traction: Is there a clear path to profit?
There is no doubt that the startup needs time to grow, but VCs want concrete proof that it has taken the right path (of profit). For this to happen:
- The startup must solve a real need. Too often founders start with an idea or product and then try to find a place for it in the market. This generally does not lead to success, in fact failure is just around the corner. On the contrary, successful initiatives are those that provide unique solutions and change a situation that until recently was considered unsolvable.
- Revenue indicates market traction. Venture capital investors expect rapid revenue growth from new businesses. A European venture capital leader expects new businesses to follow the “schema 3-3-2-2-2“. To demonstrate good traction: Revenue should roughly triple every year in the first two years after founding, and then double for at least three years after that. Successful startups have at least doubled their revenue every year for eight years.
- The path to profit must be clear. While it is typical for a startup to have net losses in the first years of life, its path to profit must be equally clear. Venture capital investors generally consider customer acquisition costs (CAC) and customer lifetime value (CLV) as key indicators. Historically, VC investors view the CLV:CAC ratio of three times at scale, as a good indicator of strong traction.
To become a Unicorn, a startup must have the ambition to solve a problem. To create jobs, add value and innovation. Being equipped with a complementary, tenacious and non-conformist team. Only in this way will it be able to attract the most coveted VCs and climb into the Olympus of innovation.
#unicorn #venture #capitalists
– 2024-03-17 02:49:13
