The term unicorn has been bandied around a lot more in
recent times than fairy tales of past; in some circles, unicorn spotting is a
very profitable sport especially early on. The number of unicorns had grown
rapidly a few years back but appears to be slowing down. Most of the earlier
unicorns have scaled higher after they achieved the status ($1 billion
valuation or market capitalization), the younger ones are happy to be acquired.
Meeting young and not so young founders some interesting trends are emerging.
The startup ecosystem has been conducive for many budding
entrepreneurs with path breaking as well me too ideas tweaked to local markets
or different segment of the market; many of them reached a critical mass to
sustain a set of customers and grow organically. The founders were focused on
building real business offering products or services to their defined
customers. They build sustainable costs and drove business with passion; as a
result they also created new proposition and market where none existed.
Their growth was not exponential and neither was their
market valuation; demonstrating patience they learnt from their mistakes,
changed course when customers demanded a change, collected a team of passionate
believers and sought money only when they wanted it for a specific purpose.
Their perseverance paid off with founders, investors, employees and customers
benefiting from the glory that was due to them. These unicorns get discussed in
every conference on disrupting the market and innovation.
For every outlier that made it, there are thousands if not
more who fell of the wayside, cast into oblivion, never to be heard of again;
not that their ideas were not good or the founders not passionate enough, they
somehow failed to execute and change course when required. In a few exceptional
cases, the founders bounced back wiser from their learning of falling, nobody
is tracking the rest. But that is not of significant interest except to
historians, the focus at this time is on the ethics of startups seeking
valuation to sell.
Recently in news one of the potential unicorns was accused
of fudging data and questionable business practices and ethics. The
whistleblowers were ex-employees whose conscience woke up when it did, probably
when they discovered these or maybe because they did not get part of the
spoils. Irrespective of the instigation for them to come out, the more
interesting fact is the shock it created for the industry and the business;
auditors descended with vengeance to scrutinize data, transactions and reports.
They had scaled well and zoomed past some of the earlier
players with initial rigor that gave them a financial cushion courtesy of
investors and venture capital. Their success was talked about with release of
growing numbers that showed path to profitability and the fact that the scale
made them larger than competitors. They were portrayed to become the first
unicorn in their defined segment; within a year with increasing valuations they
managed to hit the magic number and were formally classified as a unicorn.
Greed is a very big motivator; the founders and investors
believed that they were onto something big and that it will surpass all
expectations. Founding team tweaked numbers to show continuous exponential growth
even when the market was not growing; investors believed the story. All the due
diligence and rush to invest in the company was built on the first big round of
funding and the credibility of the investor; future investors did look at the
numbers and aberrations were explained by the founders to their satisfaction.
The reality hit the investors when allegations surfaced on
everything not being as it appears to be fulfilling the idiom: if something is too
good to be true, it probably isn’t. Auditors painstakingly poured over the
records separating the truth and fiction; incriminating evidence pinned down
some of the senior staff who worked at the behest of the founders. With operations
curtailed and staff motivation down, the valuation went Deep South and
customers came out with their own version of horror stories.
In hindsight it is evident that though the company was built
on a real business opportunity, the love affair with valuations resulted in a
change of strategy to build for valuation so that the business can be palmed
off at the height of the hype. Greed again played a role in the exposure when
some of the perpetrators discovered that they were not going to benefit to the
extent they believed. And all fell down as the nursery rhyme goes, the
investors turned their attention to check their other invested companies for
similar ailments.
Those who got away thank their stars, the rest ? I wish them
luck !
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