Why Startups Are in the Post-Unicorn Era

June 19, 2016

12:00 pm

The “Unicorn Era” referred to startups being valued a $1 billion or more. The era is coming to a close as more startups are receiving higher valuations and funding for sustainability. Critics say that these unicorn startups are a blueprint for the next risk bubble.

In these situations, the value of a unicorn startup’s growth exceeds its ability to profit. Many startups have found that their initial business plans were unrealistic and will not work.

Healthier Businesses Needed

Investor and venture capitalist funding is not going to be around for all unicorn startups. This means that the startup has to be healthier from the start in order to be self-funding. Private funding is harder to come by as the boom of startups in the technology and mobile application industries sparked increased interest from investors.

To develop a healthier business, startups need to construct a feasible and realistic business plan with attainable goals. It also means that these businesses need to stash profits away to reinvest them back into the company to support itself rather than entering a panic and desperately pitching to potential investors for additional funding.

Mergers and Acquisitions

Expect more mergers and acquisitions of industry-related companies to start happening. Some of the unicorn startups are finding that they cannot support themselves or can combine with another startup to be a stronger force in their respective industries.

Even mergers of long-standing companies such as LinkedIn are selling. Microsoft recently acquired LinkedIn to the tune of $26.4 million with the completion of the acquisition expected by the end of 2016. What drives corporations to buyout others is that it is a valued service with promise for longevity, the valuation of companies like LinkedIn is less than expected. This requires difficult business decisions to be made to save these companies from financial ruin.

Tarnished Reputations

Sometimes startups just start out too big and bold. Bold behaviors for media attention can lead to a tarnished reputation, similar to what Gawker Media learned from releasing incriminating information without consent. Although Gawker Media has been in-business for several years, it made a move that now has the company filing for chapter 11 bankruptcy.

The goal of releasing incriminating video of Terry Bollea (more commonly known as Hulk Hogan) was to bring attention to the brand. It worked, but has now given the company a truly poor reputation with increased negative coverage online, on television and in print.

When startups make bold moves and jeopardize themselves, society starts to publicly bash the brand, leaving a bad taste in the mouths of larger audiences. It is difficult to resurrect a company following such negative exposure.

Increased Startup Valuation

Unicorn startups used to be a rarity. Now, more startups have higher valuations, such as $1-billion or more within their first year in operation. Zenefits is only about three years old but already has a valuation of $4.5-billion. This is 45-times the valuation forecasted by industry experts.

The increased valuation is the main contributing factor to the end of the most recent startup unicorn era. Some startups have exceeded the expectations of respective industry experts.

Decreased Profit Valuation

Some startups blew up too fast and found to have not profited as much as expected or reported. The overhead and maintenance costs ate up most of the profits for some of the startups. Once a startup reaches the twelve to eighteen month mark, it needs to poll investors, funding angels and private sector investors again. The issue is, high-profile investors are not sought after by smaller startups, stronger startups are eating up their investable funds quickly.

The decreased profit valuation is causing some of these unicorns to plateau slightly. While they may struggle, there is still ample funding in the technology, Internet and marketing industries available.

Why the Era Is over

Seeing a startup with a short-term valuation over $1-billion is common in 2016. These dreams and ideas are no longer considered to be hard to come by. In late 2015, industry experts tallied the number of global unicorns, finding that 140 exist with most being based in the United States. China and India are not far behind.

Closing Thoughts

If another unicorn era is going to happen, the startups must have an idea that is revolutionary. Another Google, Facebook or eBay will need to be created with a concept that changes an industry in a dramatic way. The valuation of these companies would have to be at least twice what the recently-ended era was.

To prevent mergers, acquisitions and complete failure, the next group of startups should focus on securing internal funding before seeking out venture capitalists and private-sector investors.

Do you expect another unicorn era in the near future?

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AJ Agrawal is an entrepreneur, speaker, and writer. He is the CEO and Co-Founder at Alumnify Inc.

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