Jim Goetz On Unicorns: “The More Money You Raise, The Less Value You Create.”

“Get big fast” has been a startup mantra since the 90s. Many VCs try to grow their companies quickly in order to raise as much money as possible; having cash backup gives startups greater flexibility and more power to compete and conquer the bigger share of the market.

Suppose you got a job at Lyft. You got a generous salary, free lunch, lots of fun, incredible office space and even a startup equity. This company worth is more than $1 billion. Sounds like a dream. Though it is not. Company worth is on the paper. It’s a bet on a wonderful future but not a reality.

Are Unicorns A Danger?

By the end of 2015 some investors and economists expressed their concerns about high technology industry, especially about its “stars”, startup unicorns. One big problem for the unicorns is that there are too many of them. The recent listing in Fortune presents 174 unicorns. With regard to the term coined by Aileen Lee in 2013, a unicorn is something rare, magical and mythical like a startup of $1 billion evaluation. Though now they’re seemingly everywhere backed by mostly private investors and different funds.

“The number of unicorns is a sign that there is a bubble in the private market – in the dotcom era there were 10 or something, now there are too many to count,” lan Patrick, co-founder of technology consultancy Broadsight, said. “That for me is a sign that these values are untested and out of step with reality. And none of them are making money, they are all buying revenue with huge war chests.”

The “too much” problem is even more exacerbated with the case that the high valuations firms achieve in private are not mostly maintained when they go public. Please, here are the examples of Square, Etsy, Twitter and many others.

Time To Think Long-Term

At the same time investors don’t feel worried. As the entrepreneur Amish Shah wrote on Business Insider, investors today aren’t looking for the type of quick return. Instead, they know that private investment is a long-term process, where earning a profit would likely take years. Moreover, they did their best to secure their money. Many investors ask startups, especially in the last stage of financing rounds, for some special privileges or favourable conditions, e.g. “liquidation preferences”, with regard to which they will get at least money back and sometimes a guaranteed return on top.

In the interview to HBR, Jim Goetz states that they are not worried about a startup bubble. Nevertheless, most of private company valuations of unicorns have been inflated, though “in many cases investors are protected from much of the downside by terms that make the deal look more like a debt then equity”.

But what about us, startup employees? It’s really cool if you got a job in a unicorn where at least you have a salary and cool working conditions. Though most people don’t realize that their stock or equity options are next to nothing with regard to investors special privileges and liquidation preferences. Yeah, equity attracts and hooks up talented people but its worth is misleading. And what about simple startups?

There you work for a bright idea, experience, little compensation and a bet that sooner or later the company will become as successful as Facebook. In 99% it never becomes. Yeah, whether a startup bubble bursts or not, the final risk takers are we, simple startup employees.

 

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Photo credit: EmreAyar via Visualhunt / CC BY