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It’s always fascinating to see people in the startup space, both entrepreneurs and investors, talk about unicorns, those startups that quickly rise to a valuation of over $1 billion dollars. Now that’s not $1 billion in revenue but in “perceived” value. Chasing unicorns, whether you are an entrepreneur or an investor can end in disaster. Instead of looking to create startups who are solving real problems in big markets, sometimes investors artificially “fuel up” a startup based on wishful thinking more than common sense. Here are some spectacular unicorn failures:
- Jawbone: Despite grabbing an astounding $930M in funding during its 17-year lifespan, Jawbone failed to hold on to significant market share for its line of headsets, fitness trackers, and wireless speakers. With its demise, Jawbone become the second-costliest VC-backed startup failure of all time (per CB Insights).
- Theranos: This company is going out with barely a whisper. Once heralded as a revolutionary new way to conduct a blood test to detect myriads of diseases, all with a single finger prick. Only one problem, their technology did not work. The company has made preparations to close its operations. Theranos raised $172 million but its efforts are now focused on avoiding bankruptcy and prison for its executives.
- Quirky: This startup raised $185 million and relied heavily on retailers to sell its custom created products. Due to the mass reach of these retailers (such as Home Depot), the partnerships appeared to be a blessing, but margins were dramatically reduced and it ended up a disaster. Quirky was on 50,000 shelves in the country, and as a result the company had to produce a ton of inventory. This was a big upfront cost for products that had not entirely been proven. As a result, Quirky overspent on inventory and continued to raise capital as opposed to growing revenues. This vicious combination proved to be unsustainable.
So, how do you create a unicorn? Well, you don’t launch a startup with that expectation. You do launch a company with realistic expectations, one that is focused on solving a key problem in a large industry that also has a large target market. Be it Baby Boomers, Millennials or Gen Z, you aim at a large market. The wild card in a rapidly growing startup is identifying and leveraging a key trend. You should study trends carefully because if you find a trend that will sweep across both a large industry and a large market at the same time that might be the perfect storm. Great examples of this are Uber (disrupting the taxi industry), AirBnb (disrupting the hotel industry), and NetFlix (disrupting entertainment). More recent examples include Ring (disrupting home security) and Casper (disrupting the mattress industry).
Startups are not about ideas. At its basic level, a startup needs to solve a big problem in a valuable niche market or a small but key problem in a big industry. As an entrepreneur or investor, look for three things that could help you in deciding which startup to create that could leverage all three subjects listed below:
- Markets: You need to really study people in order to understand who you might target with your problem solving mantra. How much will Baby Boomers spend not to die? What keeps Millennials up at night as they angst about life? Who is this newest group Gen Z and what do you know about them? Those three market groups make up about 75% of the US population. Focus on one of these three groups and start looking for problems.
- Industries: Start with large multi-billion dollar industries that are not innovating. On the surface, these industries give the impression that everything is fine. But they are not responding to market problems or trends. Mattresses look boring, so does yogurt and soap. But they are being disrupted. The yogurt aisle looked fine until Chobani disrupted it with Greek yogurt. The financial investing industry actually understands they are about to be disrupted but the major financial brands don’t know how to combat their legacy brand image with younger customers. Pick a large industry that you care about and study it manically.
- Trends: Follow and track key trends that you care about. Set up Google alerts on each trend and learn about the trend. Will the trend affect a large market? Will it potentially change an industry? There are lots of trends changing several marketplaces and disrupting large industries. Whether its technology with AI, Iot, cloud, mobile or whether its natural and organic everything, trends ultimately create change as new companies step up and solve problems related to these trends.
You may or may not start or invest in a unicorn. Better than chasing a unicorn is to create or invest in a company that is aimed at disrupting a big market and industry and leveraging a key trend that will sweep both. That is the perfect storm.
June 7, 2019 at 02:28AM
Forbes – Entrepreneurs