Welcome To The Unicorn Club: Learning From Billion-Dollar Startups

Image Credits: Bryce Durbin / TechCrunch

Editor’s note: Aileen Lee is founder of Cowboy Ventures, a seed-stage fund that backs entrepreneurs reinventing work and personal life through software. Previously, she joined Kleiner Perkins Caufield & Byers in 1999 and was also founding CEO of digital media company RMG Networks, backed by KPCB. Follow her on Twitter @aileenlee

Many entrepreneurs, and the venture investors who back them, seek to build billion-dollar companies.

Why do investors seem to care about “billion dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns. 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.

So, we wondered, as we’re a year into our new fund (which doesn’t need to back billion-dollar companies to succeed, but hey, we like to learn): how likely is it for a startup to achieve a billion-dollar valuation? Is there anything we can learn from the mega hits of the past decade, like Facebook, LinkedIn and Workday?

To answer these questions, the Cowboy Ventures team built a dataset of U.S.-based tech companies started since January 2003 and most recently valued at $1 billion by private or public markets. We call it our “Learning Project,” and it’s ongoing.

With big caveats that 1) our data is based on publicly available sources, such as CrunchBase, LinkedIn, and Wikipedia, and 2) it is based on a snapshot in time, which has definite limitations, here is a summary of what we’ve learned, with more explanation following this list*:

Learnings to date about the “Unicorn Club”:

  1. We found 39 companies belong to what we call the “Unicorn Club” (by our definition, U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors). That’s about .07 percent of venture-backed consumer and enterprise software startups.

  1. On average, four unicorns were born per year in the past decade, with Facebook being the breakout “super-unicorn” (worth >$100 billion). In each recent decade, 1-3 super unicorns have been born.

  1. Consumer-oriented unicorns have been more plentiful and created more value in aggregate, even excluding Facebook.

  1. But enterprise-oriented unicorns have become worth more on average, and raised much less private capital, delivering a higher return on private investment.

  1. Companies fall somewhat evenly into four major business models: consumer e-commerce, consumer audience, software-as-a-service, and enterprise software.

  1. It has taken seven-plus years on average before a “liquidity event” for companies, not including the third of our list that is still private. It’s a long journey beyond vesting periods.

  1. Inexperienced, twentysomething founders were an outlier. Companies with well-educated, thirtysomething co-founders who have history together have built the most successes

  1. The “big pivot” after starting with a different initial product is an outlier.

  1. San Francisco (not the Valley) now reigns as the home of unicorns.

  1. There is very little diversity among founders in the Unicorn Club.

Some deeper explanation and additional findings:

1) Welcome to the exclusive, 39-member Unicorn Club: the Top .07%

2) Facebook is the super-unicorn of the decade (by our definition, worth >$100B). Every major technology wave has given birth to one or more super-unicorns

Only four unicorns are born per year on average. But not all years have been as fertile:

3) Consumer-oriented companies have created the majority of value in the past decade

Venture investing into early-stage consumer tech companies has cooled significantly in the past year. But it’s worth realizing that:

4) Enterprise-oriented unicorns have delivered more value per private dollar invested

Consumer companies have delivered less value per private dollar invested

5) Four primary business models drive the value and network effects help

6) It’s a marathon, not a sprint: it takes 7+ years to get to a “liquidity event”

7) The twentysomething inexperienced founder is an outlier, not the norm

Co-founders with years of history together have driven the most successes

Most founding CEOs scale their companies for the long run. But not all founders stay for the whole journey

Not their first rodeo: founders have lots of startup and tech experience

An educational barbell: many “top 10 school grads” and dropouts

8) The “big pivot” is also an outlier, especially for enterprise companies

9) The Bay Area, especially San Francisco, is home to the vast majority of unicorns

10) There is A LOT of opportunity to bring diversity into the founders club

So, what does this all mean?

For those aspiring to found, work at, or invest in future unicorns, it still means anything is possible. All these companies are technically outliers: they are the top .07 percent. As such, we don’t think this provides a unicorn-hunting investor checklist, i.e. 34-year-old male ex-PayPal-ers with Stanford degrees, one who founded a software startup in junior high, where should we sign?

That said, it surprised us how much the unicorn club has in common. In some cases, 90 percent in common, such as enterprise founder/CEOs with technical degrees; companies with 2+ co-founders who worked or went to school together; companies whose founders had prior tech startup experience; and whose founders were in their 30s or older.

It is also good to be reminded that most successful startups take a lot of time and commitment to break out. While vesting periods are usually four years, the most valuable startups will take at least eight years before a “liquidity event,” and most founders and CEOs will stay in their companies beyond such an event. Unicorns also tend to raise a lot of capital over time — way beyond the Series A. So these founding teams had the ability to share a compelling company vision over many years and rounds of fundraising, plus scale themselves and recruit teams, despite economic ups and downs.

We tip our hats to these 39 companies that have delighted millions of customers with fantastic products and generated so much value in just 10 years despite a crowded startup environment. They are the lucky/genius few of the Unicorn Club – and we look forward to learning about (and meeting) those who will break into this elite group next.

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*  Many thanks to the Cowboy crew who helped with this, including Noah Lichtenstein, Meg He, Lauren Kolodny, Kim Stromberg and Jennifer Gee.

** Our data is based on information in news articles, company websites, CrunchBase, LinkedIn, Wikipedia and public market data. It is also based on a snapshot in time (as of 10/31/13) and current market conditions, which are currently fairly “hot.”

*** Yes we know the term “unicorn” is not perfect – unicorns apparently don’t exist, and these companies do – but we like the term because to us, it means something extremely rare, and magical

**** By our rough definition, consumer companies = e-commerce + audience business models; enterprise companies = Software as a Service + Enterprise business models

***** Our definition of “top 10 school” is according to US News & World Report.

Illustration: Bryce Durbin

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