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Requiem For A Unicorn

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Editor’s Note: Micah Rosenbloom is a Venture Partner at Founder Collective, a seed-stage venture capital fund.

Marc Andreessen has said that there are 15 companies per year that generate 90% of the returns for VCs. Startups jockey for position in the “Billion Dollar Club.” In the world of startups we don’t have the S&P 500, we have the “Unicorn 50.”

Fab was once a member of this unicorn club. Founders Jason Goldberg and Bradford Shellhammer appeared on magazine covers. The company was a fixture on “most innovative” lists. Fab raised $336 million dollars in total funding, including a recent $150 million dollar round which valued the company $1.5 billion dollars. Now, in what can only be called the largest flash sale in history, Fab is reportedly being sold to PCH International for $15 million dollars, or just 1% of its former value.

Stories of outsized success are inspiring, but the disproportionate attention paid to these mythical beasts is detrimental to the broader startup ecosystem. This obsession with founding and funding unicorns has driven VC funds to become billion dollar behemoths, and as a result, ignore smaller, though still very promising, companies.

I call this kind of startup a “thoroughbred.” They’re impressive organizations that have the potential to change the lives of their customers and employees, but differ from unicorns in that they are “only” likely to exit for $100-500 million dollars. Some VCs see these companies as too small to concern themselves with, but there is something fundamentally broken in the startup ecosystem when funding a company that sells for a quarter billion dollars is an unattractive prospect.

Thoroughbreds can be lucrative

Personally, founding and selling a thoroughbred company proved to be life-changing. In 2003, Eric Paley and I raised $8.5 million dollars for our company, Brontes Technologies. Our goal was to digitize a part of dentistry that hadn’t changed since Egyptian times. We developed a hand-held scanner that allowed dentists to create 3-D models of their patient’s mouths and 3-D print crowns and fillings. We didn’t get our faces on the cover of Forbes, instead we spent most of our time on the (un)glamorous dental trade show circuit. In 2006 we sold the company to 3M for $95M, generating an excellent return for our investors, and for us.

The proceeds of the sale and our entrepreneurial learnings served as a springboard to start Founder Collective.

Bigger isn’t Always Better for Entrepreneurs

In the five years since we started the fund we’ve seen a dramatic growth in the number of venture capital funds and the amount of funds they have under management. This surplus of dollars means that any attractive category of companies—think of subscription ecommerce in the wake of BirchBox or daily deals after Groupon—will quickly have 3-5 venture-funded startups competing for investor dollars, customer attention, and resumes for key hires. Each company will raise more money than the previous one and an arms race for everything from Adwords to office space will ensue.

Not Every Market is Winner Take All

The problem with trying to attain mythical status is that there can only be one. Raising huge amounts of funding locks you into a binary outcome—you’re either worth billions or you go bankrupt.

First wave web companies were built on the strength of network effects that rewarded companies like Amazon and Ebay with near monopolies. This has led many to believe that there’s bound to be a single winner in any tech category, but not every market has a winner takes all dynamic.

Apple and Android co-exist. In adtech, dozens of very successful companies deliver solutions to brands and publishers. Even in the slow moving dental industry we had a venture-funded competitor that also enjoyed a sizable (~$200M), but non-unicorn exit shortly after ours.

Forget the Fairy Tales, Focus on Being a Thoroughbred

Not everyone has to be running a unicorn to build a great company, recruit a great team, or to raise capital. It’s hard to ignore the pundits, but just like in politics or sports, sometimes it’s the best thing one can do for their sanity. Focus on your customers, co-workers, and your venture capital strategy and there’s a good chance you can build a life-altering business that’s rewarding personally and financially.

Fred Wilson’s post about Capital and Success says it well – one shouldn’t correlate fundraising to likelihood of success. Nor should you focus on whether or not you’re a founder/investor/entrepreneur at a “Unicorn.” Remember even unicorns can be a mirage as Webvan, and now Fab demonstrate.