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Must you guess on an organization with $ 1 billion in income?

This article was translated using AI technologies from our Spanish edition. Errors can occur as a result of this process.

The opinions expressed by the entrepreneur's contributors are their own.

Grow fast or die in the DNA of many startups. The risk of failure is very great and it seems that there is no medium term, or you will succeed or fail big.

Companies moving beyond the early stages and consolidating a proven and scalable model (scaleups) appear to have matured, although the hunger for growth can lead them to develop their entrepreneurship into a mythical beast: a unicorn.

According to a Deloitte study, very few startups make it into this phase, only 0.2% make it, but new unicorns keep popping up and investors seem happy with the risk. But should one goal for scaleups be to become unicorns? What do you need to achieve it?

What is a unicorn

There are two main characteristics that define unicorn companies: first, they are private companies, and second, they have a valuation of more than $ 1 billion. And there are tens of billions of dollars worth of companies. The two main unicorns are Uber ($ 68 billion) and Airbnb ($ 29.3 billion).

In addition to their high ratings, these two companies have two things in common: They are technology startups and don't have physical assets. Uber is a huge transportation platform but doesn't own a single vehicle, while Airbnb is a hospitality service in several countries but doesn't have a bed or hotel.

If unicorns have no physical assets and are not public corporations (and sometimes don't even make a profit) then why are they getting such high ratings? Growth expectations and promised returns turn investors into risk capital in high-risk companies, but with aggressive growth.

How is the process? A startup takes part in several financing rounds. These rounds consist of selling stocks to raise money and making various agreements with investors. For example, investor A can promise a return of 1.5 times its investment, while investor B can receive a return of 2.0 times.

A unicorn has up to eight different share classes for different types of investors, from employees to venture capital funds. The valuation is based on the last price of each type of stock in the last round of funding.

"Some unicorns have made such generous promises to their preferred stockholders that their common stock is almost worthless," says Ilya Strebulaev, professor of finance at Stanford University, in a study published in March 2017.

These promises to pay result in companies getting reviews with no real foundation to support them. Stanford Business School conducted an exercise evaluating various unicorns using a method that is closer to reality. For example, Kabbage, a fintech startup, is worth $ 1 billion, but using Professor Strebulaev's method it would only cost $ 400 million, 138% less.

However, these delusional reviews don't stop investors from looking for more unicorns. In September 2015, CB Insights discovered 131 of these mythological startups valued at $ 488,000 million. Now the analytics firm identifies 228 companies with a total value of 790,000 million.

Most unicorns are found in the United States (113), China (62), Great Britain (13), and India (10), according to CB Insights.

Scaleups against unicorns

According to a 2015 Deloitte report that analyzed data from 400,000 companies, 50% of startups fail before their fifth year of sales. Of the survivors, only one in 200 will ever scale up, so becoming a unicorn is really unlikely.

However, this does not mean that if you fail to hit a $ 1 billion valuation, you will fail. The scale-ups with more stable growth are considered companies that can add a lot of value to the ecosystem and create jobs.

According to the Organization for Economic Co-operation and Development (OECD), a scale-up is a company with growth of more than 20% in the first few years (more than 10 million in the fifth year). They're not the speed or size of a unicorn, but they add value, are more patient, and have a scalable business model.

"To qualify as an accelerated growth company, progress should be at least 20%," affirmed Jorge González, director of G2 Consultores.

Almost all unicorns target large, homogeneous markets and bring to market highly attractive products that are easily accessible (e.g. mobile) and need to be used frequently, preferably several times a year. This also applies to Uber and Airbnb, but also to other already public companies such as Facebook and Twitter.

In contrast, the business of a scale-up is based on business-to-business (B2B), it takes longer for the model to mature, but is scalable in different sectors, e.g. B. in software, online services, media and entertainment formats and content, electronics, infrastructure and energy, Deloitte shows in the study Scale-Up: The adventure game.

The next unicorn

The professional services firm highlighted that of the 400,000 companies it analyzed, only 104 startups were worth more than $ 1 billion. That is, only 0.026% had this level.

To become a unicorn literally means to fight against all odds. In 2015, CB Insights foresaw that 3D Robotics, the drone manufacturer co-founded by Mexican Jordi Muñoz, would become a unicorn. Now the company is struggling to stay afloat and find its position in the market. On the other hand, DJI, its strong competitor from China, is valued at $ 10 billion and dominates the segment.

There are currently two Mexican companies that would fit into the unicorn classification. Softtek and Kio Networks, both technology service providers, are privately owned companies valued at more than $ 1 billion, according to the Tecnolatinas report.

Another seven companies in this region of the continent would receive the status of unicorns, according to the study.

Aside from the dream of turning capital into a unicorn in Silicon Valley, there are more opportunities for startups to scale up, even though the country's entrepreneurial ecosystem is still not evolving, according to Jorge González of G2 Consultores can.

What is needed

If you want to move from scaleup to unicorn, companies need to take into account the need to keep the spirit of a startup and take risks.

"You have to ask yourself how much to invest, what other products can be developed, which companies to buy, what technologies must be used to grow faster," adds González.

The specialist warns that companies that reach a sizeable size and stable income levels that enable their founders to have a good life become less risk tolerant and view their company as a “cash cow” that needs to be cared for so that it does not do so Stop giving money.

“There has to be a hunger for growth. Keep thinking like a startup, reinvent yourself and be more aggressive in the market. "

This does not mean jumping into the void and losing what has already been won, but rather a diversification strategy where partners are found who can finance aggressive growth, such as Funds, such as private equity funds, can help ensure that the company is not left completely unprotected when it turns into a unicorn. .

Examples of growth

In 2017, the number of reservations in Mexico through Airbnb grew 165%, making this market one of the most appealing to unicorns who specialize in accommodations. However, the company's strategy does not focus on reservations, rather they want to be present throughout the travel chain.

Starting last June, the company started Experiences, an option where travelers can choose between tours, tastings or dynamics offered by the hosts themselves. There are currently more than 90 experiences available in Mexico City.

Offering more services through the platform is one of the ways the app is constantly growing to deliver on its promises to investors.

You can also learn from companies that have been public for years but still keep the spirit of startups.

Amazon, owned by Jeff Bezos, the richest man in the world, wasn't satisfied with just being a bookstore, but expanded its business to include product delivery and stepped in after buying Whole Foods, opening a supermarket with no cashiers and the opportunity to enter the FedEx and UPS market directly to become another logistics and parcel company.

Jorge González of G2 Consultores is insistent in this regard: “Alphabet (the American multinational corporation whose main subsidiary is Google, which develops products and services related to the Internet, software, electronic devices and other technologies) invests money in very embryonic, very aggressive Projects. Their vision is always to really look for more. The startup spirit is never lost ”.

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