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 2-5th in market. 40% later than 5th 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.
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
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
ou may download a PDF of this article from: Why do startup CEOs fail V4
Research regarding the most critical traits of successful founders.1
Founders with complementary skills sets tend to be successful. “The best founders know their strengths and weaknesses and recruit a complementary team.” Founders of all ages can be successful. Age is not a predictor of success.”
There are three archetypes of successful founders:
- Humble Operator: Exceptional at execution, extremely humble while confident in themselves. They are resourceful and gritty. People who worked with them before tend to follow them.
- Agile Visionary: Usually first-time founders, they are young, visionary, and driven by a desire for greatness. They have a unique perspective on the market they’re going after and an intuitive sense of what their customers want. They test and iterate quickly to incorporate market signals.
- Seasoned Executive: Experienced older founders, they often have 5+ years of management experience and deep industry expertise. They are intrinsically motivated to build a company. They may have started a company before.
There are three archetypes of unsuccessful founders:
- Passionate Outsider: Usually first-time founders, they are humble and hard-working. However, they don’t have good founder-market fit and don’t have a complementary cofounder to rectify this gap.
- Overconfident Storyteller: Charismatic, compelling, and have high confidence. They are likely to be solo founders and they are often not humble.
- Stubborn Individualist: Slow to adapt to learnings from the market and not empathetic to what the customers want. They are not good at articulating a convincing narrative.
Successful founders have four superpowers:
- Running her company effectively day-to-day, learning and adapting quickly
- Results driven i.e. exploring many solutions to quickly finding the best one.
- Customer empathy, which enables finding product-market fit.
- Agile thinking i.e. able to iterate quickly based on market feedback, but at the same time persistently focused on the vision.
Successful CEOs have founder-market fit.
Founders with a deep understanding of the market have founder-market fit. There are 4 signs of founder-market fit:
- The founders are obsessed with the market. They are obsessed with market knowledge. This results in them knowing everything about the market, what a day-in-the life of a customer looks like, the customer’s urgent problems, the competitors, et.
- The founders’ personal stories. Customers are excited by personal stories which explain why the founders are obsessed.
- Personality is the ability to build a network in the market and the market’s ecosystem.
- Experience but not so much experience that the founders are constrained in their ability to disrupt, and to be able to see new and innovative ways of doing things. The degree of appropriate historical market/industry experience varies by market. e.g. Developing a new drug requires a degree of past experience.
The first point-of-failure is when the CEO is thinking of founding a company and becoming CEO. Examine yourself. Do you already have the characteristics of someone who is likely to fail?
- Not able to clearly communicate on why starting the company and what the idea is.
- Not having a very broad set of knowledge or being able to quickly learn a broad set. A startup CEO does it all without the infrastructure of a large company to support her.
- Not relentless and able to overcome all obstacles.
- Not able to do things quickly.
- Not able to quickly learn from mistakes.
- Not able to work long hours for many years. The average time for a SaaS startup to exit or IPO is 9 years. But the vast majority fail.
- Not willing to take risks. The majority of startup CEOs are forced to leave the company at some stage of funding.
- Not able to minimize cash spending.
- Not having the funds (personal savings, family, and friends) to live for a significant period of time without income from your company.
- Not able to ruthlessly prioritize time e.g. who to meet vs who not to meet; problems which must be solved vs can be ignored.
- Not having the personality and skills to build a broad set of trusted relationships with potential customers, suppliers, employees, advisors, investors, etc.
- Not able to attract appropriate coaches, mentors and advisors. There are major differences between star athletes and star coaches. The same person is rarely a star in both fields.
- Not able to listen, and clearly understand what the other person intends to communicate.
- Not willing to go all-in
- Not extremely intelligent.
The second-point-of failure is when the CEO makes a poor selection of co-founder(s) and is not able to manage co-founder(s).
- Not able to select co-founders with the range of experience and skills necessary for short-term team success. Co-founders should bring diverse experience and skills, resulting in the pool of capabilities necessary to create and launch the company.
- Not selecting co-founders with similar objectives, character, values, morals, ethics, and time lines.
- Not picking founders who have the personal financial resources to live until the company can afford to pay them or third-party investors can provide financial support.
- Not having a common understanding of what each co-founder will contribute e.g. # of hours, capital, finding capital, creating the product or service.
- Doesn’t have the skills to make the founders work well together.
- Not being clear on how decisions are made, and who makes them.
- Doesn’t ensure that the founders are physically located together and working together.
- Unable to articulate and help the all the co-founders understand and support the higher purpose of the company. If the only purpose is to make money, the chances of long-term success are low.
- Not having a common understanding of how much of the company the founders are willing to give up in return for capital.
- Not documenting expectations and assumptions. This leads to future confusion and disagreements. “People forget 40%-80% of what they hear immediately. Half the information people do recall, is recalled incorrectly”2
Your next steps
Regardless of the situation, the CEO or founders need the capabilities to be successful in the next 24 months and to be competitively differentiated from the CEOs/founders of competitors.
- If you are a startup CEO or founder: Assess your self and compare that to how others view you.
- If you are an investor, advisor, someone planning to join the startup CEO: Review the above criteria and prepare your own list of criteria. Identify the deal-killers or fatal flaws and the criteria that are important. Assess the CEO or founders. You don’t want to be associated with a CEO or founders who will likely fail.
- If you are the board of directors or major investor in a traditional established company: Prepare you own list of criteria. Identity the deal-killer criteria i.e. whether to terminate existing CEO, not to appoint a candidate as CEO or not to invest in the company. Identify the criteria that are important. Assess the CEO. Boards should not a have a CEO who is likely to fail. Investors should not deploy capital to CEOs who are likely to fail.
1 Basis Set Ventures, a San Francisco early stage fund, surveyed other funds to understand their opinion of the traits of successful vs unsuccessful founders. https://www.basisset.ventures/founder-superpowers
2 Lindsay Wizowski, Theresa Harper, and Tracy Hutchings, Writing Health Information for Patients and Families 4th Edition (Hamilton Health Sciences, 2014), Page 5
How do venture capitalists assess teams https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-assess-teams/