How Throwing Money at Startups Created Problems for the Whole Ecosystem

WeWork was burning cash at a rate of $219k per hour.

Investors were relentlessly dumping their cash into startups, and soon a new breed of companies has emerged. And then the WeWork fiasco came along.

The “unicorn” term was first coined in 2013 by Aileen Lee from Cowboy Ventures and referred to startups that have a valuation of more than $1 billion. As of today, there are more than 400 unicorn startups worldwide. The top ten unicorns are (CBInsights):

  1. Toutiao — $75B (China — Artificial Intelligence)
  2. Didi Chuxing — $56B (China — Artificial Intelligence)
  3. JUUL Labs — $50B (USA — Consumer & Retail)
  4. WeWork — $47 (USA — Other)
  5. SpaceX — $33.3B (USA — Other)
  6. Stripe — $35.25 (USA — Fintech)
  7. Airbnb — $35B (USA — Travel)
  8. Kuaishou — $18B (China — Mobile & Telecommunications)
  9. Epic Games — $15B (USA — Other)
  10. Grab — $14.3 (USA — Auto & Transportation)

What are the other characteristics of such companies?

Unicorns tend to be first-moving private tech companies (87% produce software, 6% hardware) focused on consumer markets (62% are B2C) and causing a lot of disruption in the industry they belong to.

Unicorns — first-moving private tech companies focused on consumer markets and causing a lot of disruption in the industry they belong to.

Variants of a unicorn include a decacorn, a company valued at over $10 billion, and a hectocorn, valued at $100 billion and more.

The Canadian emerging tech scene came up with their animal — the narwhal — which shares the same features, but unlike unicorns, it exists. Not bad, eh?

What’s the Difference Between Unicorns and Minotaurs?

According to Greek mythology, a unicorn is a symbol of purity and grace that could be captured only by a virgin, whereas a minotaur was a beast with the body of a man and a head and tail of a bull. And — same as the unicorn — is a mythical creature.

That’s the mythological — and anatomical — distinction. But what’s the difference between these two, in business terms?

The difference is that while unicorns are worth more than $1 billion, minotaur startups have raised $1 billion or more.

Unicorns’ value is assessed by investors that take a close look at the startup’s growth opportunities and expected long-term development. And then they come up with a valuation.

Another, faster, way of becoming a unicorn is through acquisition, as it was the case with Instagram when Facebook acquired it in 2012. At that time, Instagram had 30 million users and zero revenue.

But minotaurs have a somewhat other order of magnitude. They’re creatures of funds with a money-slinging strategy and scaling tactics that will smash every competitor. No hard feelings.

Minotaurs are the (Side)Effect of Blitzscaling

Where do these minotaur companies come from, you ask?

Some argue that the increasing adoption of the company-building method blitzscaling resulted in the birth of these companies. It’s a method that promises “the lightning-fast path to building massively valuable companies.” It’s a path of prioritizing speed over efficiency, on the road paved with uncertainty.

The fathers of blitzscaling, Reid Hoffman and Chris Yeh, intended to develop a method for an entrepreneur to tackle the market and tap into its potential, because the ecosystem, in which these entrepreneurs operate, is harsh and only those who spot the opportunities and make immediate use of them, win. It has many supporters, especially among tech startups.

But also venture capitalists find it attractive. For them, it is more lucrative to make fewer, bigger bets, rather than to spread their money thinly across the market.

Yet, even if the intention was to help the startups to survive in an ever-changing, highly-competitive market, the fund-givers and fund-raisers sensed the power and went berserk.

They Aim to Weed Out the Competition, Fast

The past couple of years revealed that investors — funds, venture capitalists and the like — tried to infuse as much money into a business so it could dominate the market and weed out all the competition (or make it as hard as possible to enter the market in the first place).

Money does not necessarily bestow a competitive advantage

They are creating markets where monopolies, or at best duopolies, dictate the terms. Potential competitors are either acquired and integrated or acquired and shut down.

Worried voices make a bright point in saying that this market behavior kills innovation.

Money does not necessarily bestow a competitive advantage. The pre-blitzscaling era has produced companies by investing little money — compared to today’s standards. Google raised $36 million pre-IPO money, Salesforce $64 million, and Amazon $108 million. Their success drew from the strength of their solid business models and technological novelty, not necessarily the money they raised (although, it for sure helped them to jump-start).

Another common feature among the minotaur companies is the time they need to earn profits.

Look at Uber. After a decade of being on the market, they’re still not making any money. Every ride you make with an Uber is subsidized by their investors — primarily by SoftBank.

On a side note, the first-ever of this kind, the alpha minotaur, was Alibaba (in 2005), and the first American — Facebook (in 2011).

WeWork, the Uber-Minotaur

WeWork, the real-estate-firm-that-brands-itself-as-a-tech-company, is a leader in the shared workspaces market. Their offices are all over the world. Not only startups make use of their offer. It’s also the established players who want to accommodate digital or innovation labs.

The company is losing $219 000…per hour.

Similar to Uber, it has never made a dime. And it is also backed by SoftBank. This time, however, just before the WeWork IPO, investors sensed something is wrong and pulled the plug. The valuation went down to $5 billion, from $47 billion, in just one month, prompted mainly by the disbelief of its business model. According to the Financial Times, the company is losing $219 000…per hour.

WeWork is not the first company that has lost — or never earned- money. But the areola that accompanied the firm has raised many questions.

In particular, the way of scaling their business by pairing long-term office leases with short-term occupants is somewhat risky in the light of a potential economic recession.

On top of that, the now-former company CEO was a controversial person, even for the startup tech scene. The golden parachute worth $1.7 billion given to him by Softbank only bolstered the ire.

We still have to wait for the full effect of such an act. But the first one seems to be visible.

Raising Startup Money Becomes More Challenging

That’s my prediction for how investors will look at these companies in the future. WeWork has left a negative impression, and I bet that many of them are reviewing their investment strategies now. They will be more cautious and thorough in their due diligence. As they should be in the first place.

The fairytale of the minotaur did not end well. After dwelling in the maze-like labyrinth, he was eventually killed by Theseus.

Maybe that’s what should happen with his business twin, too.

All Rights Reserved for Piotr Domek

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