For quite some time in Silicon Valley, the highest aspiration a startup could hope to reach was attaining “unicorn status”. This is essentially a company that has a valuation of $1 billion or more. Or, as Mashable more bluntly put it: “A startup that is a very tangible, concrete evidence of just how much money is looking for a home in Silicon Valley.”
Founders wanted to found them, investors wanted to invest in them, and the tech press wanted to write fawning coverage of them. There was just one problem: many unicorns were, in a sense, a Ponzi scheme. Everyone needed to believe in them to give them an inflated valuation that high. The reality is that most of Silicon Valley’s earliest unicorns didn’t—and in some cases, still don’t—have a revenue model that can sustain them. They are companies that grow on hype and investor dollars, until the moment of truth hits and things come crashing down.
It’s true that some early unicorns have found a way to make their business model sustainable, Facebook being one example. When it first started, its unique selling point was that it was attracting more users than any other social network. However, it also figured out a way to monetize those users via advertising in a way that grew apace with its growth. Twitter, another unicorn, has struggled a bit more to monetize its large userbase. While Twitter is more relevant than ever, its financial situation doesn’t reflect that. This is the typical paradox of the unicorn: its valuation and usership isn’t an accurate reflection of its long-term health.
That is perhaps why, a few years into the unicorn phenomenon, people are starting to see the value in a new kind of startup: “Zebras”. These are companies that don’t rely on the “eyeball economy” to get funding and grow exponentially big until they turn into a Facebook-like monopoly. They prove their business model and long-term financial plan up front.
As a viral Medium post on the Zebra phenomenon put it: “We believe that developing alternative business models to the startup status quo has become a central moral challenge of our time. These alternative models will balance profit and purpose, champion democracy, and put a premium on sharing power and resources. Companies that create a more just and responsible society will hear, help, and heal the customers and communities they serve.”
So, what does the shift away from unicorns towards zebras mean for the startup economy? What kinds of companies will we start seeing now that we are shying away from the glossy, over-funded, and under-proven? It’s likely that we will see more hardware companies, as selling hardware represents a business proposition that social network simply does not. It’s also likely that the growth rate of companies will slow. Instead of, say, growing their usership ten-fold in a year, doubling usership will be considered a measurable compliment.
In addition, you might see products, apps, and services that are more niche and don’t necessarily have mass appeal beyond a specific user group. Whereas previously investors might have hoped to fund companies that everyone, everywhere could use, they are now seeing the value in funding companies that serve a small group very well, even if it’s not necessarily going to give them as big a return.
Overall, the declining emphasis placed on company valuation will likely be a good thing for the startup economy at large. It will place the value more on substance rather than spin, and prevent the much-dreaded “bubble” that many in the startup world have been warning about for some time now. It’s up to both founders and investors though to shape the next range of offerings.
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