Recently, startups have attained unicorn status in a short time. According to Fleximize, the US shopping website Jet.com holds the record for the fastest company to reach unicorn status. The company attained this feat just 4 months after it was founded. But Jet.com isn’t the only company that “got big fast”. Xiaomi became a unicorn in less than two years, Airbnb pulled it off in three years, and WhatsApp in four years.

The average time to unicorn is about 5 years, with Asian companies taking the lead. One company took it upon itself to find out why new unicorns are being spun out in record numbers lately, and their research revealed something rather shocking. In this article, I’ll introduce the get-big-fast strategy companies adopt in the race to attain unicorn status and what the researchers discovered to be the one secret behind the increasing numbers of unicorn companies.

Origin of the term unicorn companies?

A unicorn is a term used to describe a privately held startup valued at over 1 billion dollars. The word unicorn was first used by venture capitalist Aileen Lee. She was the founder of Cowboy Ventures, a seed-stage venture capital fund. Lee wrote an article titled “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups,". In the article, she mentioned that only 0.07% of companies founded in the early 2000s ever reached a billion-dollar valuation.

That is rare, and in an attempt to explain just how rare these companies were, Lee compared them to the mythical creatures, Unicorns. A few years later, Lee wrote a follow-up article, this time, the number of unicorns had increased by 115% with a total valuation 2.4 times her previous analysis. A statistic that the author described as “jaw-dropping”. So what is behind the sudden rise of unicorn companies over the years? One Silicon Valley Consultancy firm took it upon itself to find out.

Three Key Lessons From Play Bigger Research

According to its Crunchbase profile, Play Bigger is a strategic advisor focused on business, marketing, product, go-to-market, and financing strategies. The company’s research was aimed at confirming the rise in the number of Unicorn startups examining the impact of excess private capital on the future success of a startup, and the best time for companies to go public. If you own a startup, or plan on doing so, you need to know the importance of valuation and the key metrics that determine how a startup is valued.

Time to Market Cap - Leveraging on Social Networks

The first observation the researchers made was how fast startups achieve unicorn status.  To determine this, the researchers divided the market cap of 1125 firms by the number of years since they were founded. The outcome of this is known as the time-to-market cap for each company. With this value, the researchers could rank the companies. The bigger the value, the faster the startup is growing. So a 5-year-old company with a market cap of 2 billion dollars is growing faster than a 10-year-old company with a market cap of 2 billion dollars.

[This calculation can help you understand just how fast your startup is growing, and even project when you are likely going to hit unicorn status.]

What the researchers found out was that startups founded between 2012 and 2015 grew twice as fast as those founded between 2000 and 2003. This confirmed Aileen Lee’s suspicions that startups are growing faster now than they used to. Why?

Experts who accessed the results called it a bubble, blaming private investors for “overpaying for equity” in startups. This fact becomes clearer when you consider that the valuations of most startups tend to drop when filing for an IPO. Another explanation is the speed of networking by leveraging social media platforms. Facebook, Twitter, Instagram, etc., have taken word of mouth to a whole new level. Users across the globe can quickly share thoughts about a startup’s product or services.

This means that these startups get early exposure that works to their advantage as their products and services become known globally, quickly. Private investors can make quick judgments of a startup’s value based on the reactions trailing its products and services online. Play Bigger founding partner calls these “fundamental forces”, and he is right.

An example is Nothing, a UK-based tech firm that manufactures smartphones and other consumer electronics. Nothing managed to gain global recognition in the highly competitive smartphone market. This is impressive for a company that was launched in 2020. One thing the company did right to help its growth was capitalize on social media like YouTube, where it has over 600 thousand subscribers.

Post-IPO Valuation - It is best to go public at peak growth phase

It is a commonly held belief that a startup needs cash to survive. That is, the more money a startup has, the longer it can survive the harsh forces of the market. This is true for startups whose strategy is to expand their operations as quickly as possible. After comparing the money raised before IPO and the growth in market cap of 69 companies post-IPO, the researchers found out that excess private cash might have the opposite effect on innovation in the long term. According to the research findings, staying private too long hurts the company’s overall growth post-IPO.

This is because the company would have passed its peak growth phase while remaining private. By the time it is ready to go public, the company is already experiencing a decline in growth. This means public investors might value the company less during an IPO. The researchers arrived at two conclusions- one, there is an “IPO Window”, and this is usually at the time when the startup is experiencing significant growth. Also, the age of the company is a better predictor of market cap post-IPO, compared to the amount of money invested in it. The longer a company stays private, the lower its post-IPO value and vice versa.

[Companies that go public between the ages of six and 10 years generate 95% of all value created post-IPO,] - Al Ramadan

This finding was also supported by Jim Goetz, a partner at Sequoia Capital. According to Goetz, there is a negative correlation between cash raised and the value of a company. He believes that too much cash makes a company lose discipline.

[In our portfolio there is a correlation between cash required and long-term market cap—but it’s negative. The more you raise, the less value you create.]

So yes, private cash is good for startups but over-reliance on private cash can ruin a company’s chances of impressing investors during an IPO resulting in lower valuations.

Category Kings - Solve a unique problem, and be a first mover.

The final lesson from the research is; what identifies companies that stand out post-IPO with an impressive valuation? According to the research, one of the major indicators of value is when a company is able to carve an entire niche for itself by creating new categories of products or services. These companies are referred to as category kings and they capture a huge percent of the market share.

Conclusion

Running a startup is like balancing a knife edge. One move and you could tip to either side. It is therefore important for entrepreneurs to grasp as much knowledge as possible and fine tune their strategy to get the best results possible. In this article, I’ve discussed three key lessons from research that founders can use to accelerate the growth of their companies. Click the link below to read the original research. http://playbigger.com/time-to-market-cap

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