Failing after achieving that billion dollar valuation

What does it mean for a company to fail once it has achieved unicorn status? Is it disappointing investors who got caught up in the frenzy, by not continuing to generate growth at unprecedented levels all the way through exit? Is it not maintaining sky-high valuations and dipping below that coveted billion dollar mark? Is it blowing up spectacularly, proving in the end there was no product-market fit after all?

I began to ponder this question after reading an article in today’s New York Times (11.20.2015) titled “LivingSocial Offers a Cautionary Tale to Today’s Unicorns.” Though at its peak LivingSocial reached a valuation of $4.5 billion, today the company has undergone a radical shift in fortune. It has downsized from 4,500 to just 800 employees, and is currently reconsidering its identity going forward.

I believe there are a few key lessons to be learned from LivingSocial’s experience that are especially important for “successful” startups to keep in mind to avoid disastrous failure down the road:

  1. Keep questioning your value proposition – While this can be very hard to do in an environment in which everyone is telling you how good your idea is (and reinforcing that message with the valuations being attributed), remain skeptical. Ensure that the market tells the same story, and pivot as necessary despite the challenges of doing so at this point.
  2. Know that the well can still run dry – Though VC investors themselves may be to blame for propping up companies with some of the skyrocketing valuations seen today, they will eventually abandon those companies that don’t perform. Don’t assume that since money is flowing freely today it will continue to be there regardless of business fundamentals.
  3. Be aware that the stakes will only keep increasing – As the company grows and gains more notoriety for having joined the unicorn club, the consequences of failure begin to worsen. There is more money on the line, greater expectations from friends, family, and investors, and employees begin to believe that they are invincible. Failure is incredibly public at this point, so “failing well” becomes even more important should this situation arise.

Despite their mythical status, unicorns are not invincible.

7 thoughts on “The Unicorpses

  1. Thanks for sharing this Kaitlyn! I also think that having a unicorn status comes with additional pressure and risks for the startup, and as such is not always a good thing. This article (http://www.inc.com/jill-krasny/the-danger-of-excessive-valuations.html) mentions among others:
    – Additional pressure for the team to achieve very ambitious milestones
    – Challenge of managing an “angry crazy” investor when results are not in line with the crazy growth that was expected at the time of the investment
    – More difficult to achieve a higher valuation in next rounds of funding and dilution risks
    – Difficulties to exit by being acquired, as very few companies can afford it
    – In the case of an IPO, fear of significant stock price decrease when the frenzy stops

    When reading your post, I also thought that the lessons you draw are applicable to any period of success in life, whether in a startup environment or not, whether in your professional or personal life. I do think that in general, it’s always a good thing to keep questioning if what you’re doing is the right thing to do according to your own criteria and the different stakeholders’ ones. It’s also good to keep in mind that things may not work as you think they will and be prepared for bad times when things turn wrong. To finish with, managing expectations is crucial, even more so when people believe in you and you have been successful so far.

  2. Thank you Kaitlyn for your post! Your post has reminded me of what I learned from BSSE (surprise!). We talked a lot about disruptive innovation, in which many cases are small startups. These startup enjoys high growth because they did not get the incumbent’s attention until they are too big to ignore. However, one thing I took away from that class is how these startup, once successful, have to keep innovating themselves out to defend their position from future disruptive innovation. On top of what you have mentioned, I think there are a few things that these successful startups can do to keep them in the growth trajectory:
    (1) Keep asking “What do my customers want” constantly – In LivingSocial, the initial customer needs is to explore local new businesses through discounted offers. However, the customer needs probably change in times as they have explored enough of the local businesses. Sometimes your success could end up become the obstacle for your next one.
    (2) Know that your team might also need to change with the needs – it was sad to let go with the people who have fought the initial battle with you. However, sometimes their skill set and expertise is no longer relevant to the changes that the startup is heading to. Founders have to make tough decisions to keep the company growing, sometimes it means replacing their loyal team members or even themselves.

  3. Kaitlyn you bring up a great point! Even more reaching unicorn status I agree with you that it is extremely important to constantly question your value proposition. I honestly feel many failures in this module need not be failures if only they had questioned and pivoted their value proposition. We saw this with both Dinr and Segway. I think both founders were fixated on what they thought the problem and their solution was that they failed to question their value proposition or to research into the potential of different value propositions their solutions could provide. We all know Plate’d and Blue Apron as successes so its hard to say Dinr could not have been successful and similarly Segway could have targeted more specific use cases to see success in the market. Having said that we don’t know if Blue Apron or Plat’d will continue to succeed. The biggest takeaway for me from your post is that we all have to ensure not to get swept up in complacency!

  4. Great post Kaitlyn! I think founders should put a post-it with these points on their desk to be constantly reminded. In addition to what you’ve laid out, wanted to add another point along similar lines. Founders should beware of complacency creeping in post unicorn status. Once you have reached the unicorn status, I feel like the media and even practically everyone around you brand you as a success. The positive coverage, continuous congratulations you receive drive you to become intoxicated (figuratively and literally) by your success to date. Attaining a unicorn status is no easy task, but it will be more difficult to grow and deliver the returns investors expect as more companies will challenge you to displace your company in the market. The founders should continually remind themselves and their employees that the unicorn status is just another milestone, and that they should keep focus until the mission they set out to do is accomplished.

  5. Failing well in these cases seems especially difficult, as your post and some of these comments outline nicely. I think once you are a unicorn company/founder, there is an “air of inevitability” that everyone begins to treat you with. You might be a billionaire on paper, and maybe you gave last year’s commencement at your alma mater. It seems even more likely to me that in this case the founder will hang onto the company to the very end and risk making bad (destructive) decisions during the failure process.

    On the other hand, failing an early stage company that never gained traction seems easy in comparison!

  6. Really interesting reading your post after our discussion about unicorns today. As part of continually questioning your company’s value proposition, I think it’s important to revisit how you’re measuring that value prop. For LivingSocial it was growth in subscribers – and so they started spending recklessly to acquire new users. We’re definitely seeing this kind of behavior in some unicorns today which is troubling.

  7. Great post Kaitlyn! The Unicorpses are ultimately a result of questionable valuations for all the reasons that you highlighted. I’d like to add that investor sentiment coupled with the belief that VCs make all the money on unicorns (which is true for the biz model of many top VCs, a topic deserving a blog on its own), are also responsible for driving the balloning valuations that we’ve seen in the tech space and most recently in healthcare. According to CB Insights (https://www.cbinsights.com/research-unicorn-companies), this year, the number of tech unicorns valued at 1 billion or more totals to 69 companies, that is 1.3 “unicorns” being created on average per week! The problem is that successful VC-backed tech sector IPO’s have been far and few in between. In response to that and along with LivingSocial’s and Square’s IPO, there has been a frenzy of articles in Forbes, Fortune, Business Insider, etc throughout October and November all reporting that “winter is coming” (finally!) to Silicon Valley. Apparently, according to several reporters the investor sentiment has changed to fear and everyone is waiting for the bubble to burst. It will be very interesting to see how many unicorpses we see as the pressure for downward valuation increases.

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