When it comes to start-up models for businesses, ‘unicorns’ need to move over because ‘zebras’ are the future

In the current climate, entrepreneurs would be wise to follow the path of the zebra: concern yourself with usefulness, rather than innovation; be local rather than international; and follow your passion rather than investors’ whims, says Roger James Hamilton

The unicorn is a mythical, solitary creature. Its legend is one of magical powers and dreamscapes; the stuff fairy tales are made of.  Its only natural predator is the Pegasus… which is also an imaginary beast.

Then there’s the zebra, an African equine known for its bold black-and-white stripes. There are at least half a million of these animals in the wild. The zebra has a number of natural predators, including lions and hyenas; however, their herd instinct and striped pattern (which appears as tall grasses to colour-blind predators) offer protection. Zebras have inhabited earth for four million years, and as a whole, the species is thriving.

Why are we talking about two seemingly unrelated creatures? One of which is mythical, and the other which has been a resilient mainstay on this wild earth for millions of years?

Because they’re being used to describe two very different types of business startups – and it’s important that entrepreneurs understand the variances in viability, staying power and relevancy.

The unicorn as a business startup

You know what a unicorn looks like in fairy tales: it’s a horse with a horn. But what’s it look like as a business?

A unicorn is a privately held start-up that’s valued at $1bn USD or more. This type of startup has been dubbed ‘unicorn’ because of its low likelihood of survival. Statistically, it can’t really exist.

The term was first used in 2013, when 39 companies met the unicorn criteria. As of this year, there are about 465 unicorns, including names like Stripe, Chime, Airbnb, Palantir, Didi and Ant Financial.  

One of a unicorn’s defining traits is rapid growth. It starts off with large rounds of funding, and may even gouge prices in order to gain footing in the market. It isn’t concerned with early profitability, long-term sustainability or value creation as much as with putting its competitors out of business. Its business practice could be described as an all-out grab for monopoly.

Acquisition often plays a large role in the creation of a unicorn, with buyouts of large public companies that can compete, instead of the development of new ideas or business models.

The unicorn wants to grow quickly with a focus on quantity over quality, establish a monopoly by annihilating its competition, and acquire as many users as possible.

The zebra as a business startup

The zebra is used to describe a different type of start-up business. Revenues hover between $5m USD and $50m USD, it serves customers within a specific niche, requires annual growth capital of $100,000 USD to $1m USD, and generally has more than four streams of revenue.

There’s an early focus on quality, and the procurement of customers with high loyalty potential—customers who need the solution that the zebra is offering. A profit margin is important because it will be necessary for steady growth and sustainability. There’s a sense of community and collaboration, rather than competition. Relationships are key, and there is a higher purpose, beyond monopoly.

This creates a double bottom line: Zebras want to conduct real business, by solving a pressing problem in a sustainable way, whilst addressing contemporary challenges. For instance, Toya is daring the status quo through the development of tech that empowers girls. It creates video games that are of interest to young women, to encourage them to pursue jobs in technology. This zebra company is working the solve a problem: Too few women in technological fields.  

Zebra companies believe that there’s room for more than one superstar in a market—or even in a niche. Zebras are herd animals after all, congregating in a ‘dazzle,’ and there’s safety in that herd. Each member of the group looks out for the rest, and as a result, they all have a better chance of survival.

The zebra believes that competition is healthy for everyone involved—something to watch and use for motivation and growth, but not something to squash. It closely observes consumer trends and continually strives to solve new and developing problems for those consumers.

How valuation works…for unicorns

When we talk about unicorns, there’s a lot of focus on valuation. But where does that number come from, anyway?

First, it’s important to understand that much like the unicorn itself, valuation is often a fairy tale. It’s an estimate at best, derived from the potential for growth and development that’s expected. It’s about long-term forecasting—not the current position of the business. In fact, not one pound in profit is necessary for establishing a valuation, and therefore, it’s not at all related to actual performance.

In many cases, a unicorn is not comparable to any other business. It’s the first of its kind, so it’s hard to argue with its assigned valuation.

It’s in the best interest of the unicorn to have the highest valuation possible. But why?

In order for the unicorn to survive the short term, it’s got to receive large rounds of funding. And if a high-stakes investor is going to hand over millions, the valuation has to be astronomical. Only then can large amounts of market share be captured, to prevent the appearance of competitors. In short, get as big as possible, as quickly as possible, so anyone else would be crazy to think they could compete.

Another reason that high valuations are attractive is acquisition. High valuations bring high premiums, and when start-ups receive extraordinary buy-out offers, they can use those to further validate their existence.

And since those high valuations bring in premium investments, innovations can move more quickly, customers can be reached in record time, and mass production can be achieved.

So, in truth, valuation is not about real money. It’s about what business owners and current investors want new investors to believe the start-up is worth.

The metrics that were once used to determine value, like multiples of profit and revenue, comparability in the industry, discounted cash flow, cost of replacement…are not used to designate a start-up as a unicorn.

The only way to determine true valuation is through an IPO (Initial Public Offering). Those interested in viability, sustainability and relevance will want the real numbers. They’ll say, ‘Show me the money.’

And unicorns will struggle to do that. That means they’re still…you’ve guessed it…mythical creatures.

Unicorns: why they exist

Defenders of the unicorn will attribute their movement in markets to current technological innovations—meaning that business is moving faster than ever.

But not everyone is buying it.

Others maintain that there’s a tech industry bubble, ready to pop. They see unicorns as nothing more than poorly bred horses with cheap plastic horns glued to their heads.

In an effort to bring in large investments and prove those valuations, investors will say things like, ‘There’s a massive market for this product.’ But how can that be proven if the market is new? They may say, ‘We have millions of users.’ But how many need it, or will pay for it?

Unicorns endure because money follows money. The big players are only looking to make large investments. If your business only wants $100K, you may not get a second look.

There is an obsession with valuation.

But how long can that last?

Be a zebra

You can choose to follow the unicorn trail into the forest, committing to over-valuing, disrupting, thrashing competitors, establishing a monopoly using cooked numbers…all for something that may not exist a decade from now. You can engage in magical thinking and keep your fingers crossed for messy success.

And if that’s your tendency, it’s no wonder. This is the bar that’s been set. Entrepreneurs are being conditioned to believe that anything short of astronomical is not worth their time.

Nothing could be farther from the truth. You’re being set up for failure.

Instead, you can focus on delivering a quality product or service that solves a real problem. You can aim for sustainable growth that will carry your business through your lifetime and beyond. You can benefit your family, your community, your cause…instead of lining investors’ pockets.

Look at Facebook and Uber, for instance. Think of all the controversy that has surrounded those companies in the last few years. They are too far down the unicorn path. They will always have to choose between sustainability and societal responsibility, because they weren’t built with dual purpose (or black-and-white stripes). They don’t pay their market share, they just acquire it. They have become their own ethical challenges.

I would advise any entrepreneur to follow the path of the zebra. Concern yourself with usefulness, rather than innovation. On local rather than international. On your passion rather than investors’ whims. 

And you won’t be galloping against the grain for too long. There’s a shift on the horizon. Consumers have growing concern for the morality of the companies they do business with. A small but powerful pod of investors is becoming increasingly discerning. And entrepreneurs are demonstrating unparalleled courage—moving forward steadily, in the midst of their dazzle…with an eye on (and concern for) the future.

Roger James Hamilton is a world-renowned futurist, New York Times bestselling author and founder of Genius Group, a $100 million group of companies leading the entrepreneur movement which includes his tech company GeniusU. https://www.geniusu.com/

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