What is the purpose of this article?

• Generate discussion among founders, investors, boards of directors, and C-suite regarding the characteristics of billion dollar startups.
• Enable the discussion to be fact based rather than base on myths and anecdotes.
• This discussion should be held whether you are startup or a long established global company.
• This article refers to three fact based analytical books and reports and includes only a small amount of the enormous collection of factual analysis.
• This article doesn’t tell you what to do. Just because information is correlated, does not mean there is a cause and effect relationship.

You may download a PDF of this article from: Billion dollar startup characteristics

What are the critical learnings in this article?

• A billion dollar startup requires a large number of customers who believe: they have urgent problems and needs; are willing and able to pay to address those problems and needs; and that they can obtain better value from your company that the competition.
• Success depends upon understanding customers better than the competition. This understanding must be fact based using interviews supplemented by survey and analysis of customer actions.

Characteristics of unicorns – startups which achieved over $1 billion U.S. valuation.

Ali Tamaseb studied over 200 unicorns founded between 2008 and 2018.¹

What were the founders’ backgrounds?

• A founder’s age doesn’t correlate strongly with success. Median age was 34. ²
• The #2 person had an even wider age distribution, from 16 to 76 at time of founding. Founders of health and biotech companies skew older. ³
• 20% of unicorns had a sole founder. 36% had dual founders, 3 co-founders 28%; 4 co-founders 12% more than 4, 4%. ⁴

What was the founders’ education?

• Education: 36% had bachelors; 22% had MBA, 33% had another advanced degree. College dropouts less common than founders with PhDs. ⁵
• Of those that went to university: about 35% each went to global top ten vs not in global top 100. About 30% went to global 11 to 100 universities. ⁶

What was the founders’ work experience?

• 30% of unicorn founders had only worked for themselves before.⁷
• 58% of those who had worked for other companies, (i.e. 70% of all founders), had worked for Tier 1 companies with rigorous hiring processes and reputation for hiring the best. 28% had worked for Tier 2 companies (large and well known). 14% had worked for companies not well known.⁸
• Over 50% of founding CEOs and founding CxOs had less that 1 year of relevant industry or work experience. ⁹
• 75% of healthcare and biotech founders had directly relevant industry experience; 40% of enterprise technology; and 30% of consumer unicorns. ¹⁰
• What seems to matter was: quickly learning about a new space with unbiased mind, soft skills like building a network, managing a team, hiring and firing, raising money. ¹¹

What was the founders experience with previous startups?

• 59% of unicorn founders had been a previous founder, sometimes successful, sometimes not. ¹²
• Those who had run a company before, experience ranged from a year to 27 years. Most common was 2-3 years (about 25%), about 54% were up to 5 years experience. ¹³

How severe and urgent were the customers needs and problems?

• Two approaches: Pain killer (well defined and deeply annoying pain point) or vitamin (customers get better value, efficiency, entertainment or joy) ¹⁴
• 68% of unicorns were pain killers. ¹⁵
• Close to 40% of unicorns address productivity; about 20% address saving time; 11%-15% each are: convenience, entertainment, health. Safety and security are around 2-5% ¹⁶
• Close to 50% of unicorns were system integration (bringing together existing technology. Value add comes from unique business model or marketing strategy). About 25% were technical i.e. fair amount of engineering. About 25% were deep tech i.e. it’s all about being able to create the new technology or drug. ¹⁷
• Over 2/3 of unicorns were highly differentiated from competition. Less than 1/3 were incrementally differentiated. ¹⁸

What was the market demand?

• More than 60% of unicorns started in large markets with well established demand. They either took market share or expanded the market. About 25% started in medium sized markets. About 15% started in small markets. Few unicorns created new demand or waited for the market to mature. ¹⁹
• 68% of unicorns competed for market share. 32% created a new market. ²⁰

When did the founders enter the market?

• 30% of the time unicorn was first to the market. 30% of the time 2-5^th in market.  40% later than 5^th in the market. ²¹

 What are the characteristics of companies which achieved $1 billion in revenue?¹

• More than 60% of new public companies between 1980 and 2010, no longer existed in 2010. 4% of new public companies achieved $1 billion in revenue. 34 public companies a year achieved $1 billion in revenue, regardless of economic cycle.  Only 4% of $1 billion revenue companies make it to $10 billion in revenue. ²
• 11,000 companies did IPO since 1980 and to end of 2007. Only 4% (410) grew to $1 billion in revenue, but 72% of all IPO taxes, 63% of IPO employees (i.e. 9 million), 64% of market value (i.e. $2.6 trillion), and 69% of all IPO revenue (i.e. $3 trillion).³
• Failing companies had blind passion, did not self correct, did not adjust to changing customer needs, ran out of cash.⁴
• Exponential growth companies continue to grow through tough economic times and recessions.⁵
• Exponential growth companies created and sustained break through value propositions – High order benefits or exceptional value as perceived by customers ⁶
• Exponential growth companies exploited high growth market segments: created new markets, redefined markets, or created category killers (i.e. killed incumbents). Imported ideas from other industries. Kept redefining market segments. ⁷
• Growing to $50 million revenue requires brute force speed. Create and grow customer advocacy community and market momentum as quickly as possible. After $50 million in revenue, have thoughtful speed.⁸
• The key to growing a startup to $10 million revenue was based on analyzing 2,000 business plans.⁹  Create a powerful value proposition. It must address a deep, frequent or changing unmet need. The company has a unique ability to deliver on that need. Contrast the company benefits to the competition. Talk with customers to understand the “frustration” or “What’s not working well”.¹⁰

What are the characteristics of SaaS unicorns which became public?¹

This researched examined 1,000 SaaS companies in Canada and the U.S.s 400 of which became Unicorn by going public. Many of these went public after 2013.

• On average, companies needed $125 million in revenue to become a unicorn when they went public. This required $212 million of invested capital. ²
• The TAM (Total Addressable Market) size when going public needs to be at least $25 billion.³ The % of TAM at IPO time can range up to 2.2%⁴. Facebook’s yearly revenue at the time of its 2012 IPO was $4.2 billion. The prospectus stated the addressable market was $588 billion, thus % revenue was about 0.7% of addressable market.
• Most startups do not reach the IPO point but are acquired. The TAM required for acquisition is much smaller than $25 billion.
• You need a 50% differential in how customers measure competitive differentiation. Customers perceive quality, speed and cost. The customer’s costs may be far higher than what they pay your company. ⁵
• You have product market fit when your net promotor score is at least 30 and the % of customers that would be very dissatisfied if they did not have your solution is at least 40%.⁶
• Current year marketing and sales as % of current year revenue. ⁷ About 63% when revenues are $10-50 million. About 52% when revenues are $40-$250 million. About 38% when revenues are over $250 million. The implication is that unicorns usually lost money for many years. Investors provided the capital because lifetime customer profitability exceeded the one time customer acquisition costs.
• Current year marketing and sales as a % of next year’s revenue should be less than 33% at IPO time. ⁸
• The higher the growth rate, the higher the valuation, in terms of revenue multiple. ⁹

 What are your next steps?

• Assess your understanding of your customers e.g. how they perceive you, the value they obtain from you, their profitability, etc. Improve your understanding of your customers.
• Review the facts in your plans. Identify the source of each fact.
• Review the assumptions in your plans. Determine if there are facts and analysis which would change your assumption. Be clear on which assumptions are opinions and guesses.
• Be clear on the urgent problems and needs of potential customers and determine how many are actually willing and able to pay for a solution.
• Recognize facts, assumptions, and analysis are only input to the judgements and decisions you make. E.g the amount of revenue you need to be a unicorn when you IPO may be very different from the average.

Footnotes

¹ Ali Tamaseb, Super Founders (New York: Hatchette Book Group, 2021)

² Ibid., 15

³ Ibid., 16

⁴ Ibid., 17

⁵ Ibid., 32

⁶ Ibid., 34

⁷ Ibid., 44

⁸ Ibid., 45

⁹ Ibid., 49

¹⁰ Ibid., 51

¹¹ Ibid., 52

¹² Ibid., 60

¹³ Ibid., 67

¹⁴ Ibid., 114

¹⁵ Ibid., 114

¹⁶ Ibid., 117

¹⁷ Ibid., 118

¹⁸ Ibid., 122

¹⁹Ibid., 131

²⁰Ibid., 133

²¹ Ibid., 145

¹ David G. Thomson, Mastering the 7 essentials of high growth companies (Hoboken, New Jersey: John Wiley & Sons, 2010)

² Ibid., 3

³ Ibid., 9

⁴ Ibid., 21

⁵ Ibid., 22

⁶ Ibid., 32

⁷ Ibid., 33

⁸ Ibid., 75

⁹ Ibid., 163

¹⁰ Ibid., 164

¹ Charles Plant, “Unicorn Math  an Algorithm for Rapid Growth”, Narwhalproject.org, Charles Plant, https://narwhalproject.org/wp-content/uploads/2020/06/Unicorn-Math.pdf

² Ibid., 3-4

³ Ibid., 5

⁴ Ibid., 6

⁵ Ibid., 7

⁶ Ibid., 10

⁷ Ibid., 11

⁸ Ibid., 11

⁹ Ibid., 15

 What further reading should you do?

• Read the two books and website article referenced by the footnotes.
• Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/