Most unicorns not obvious unicorns when initially funded

As of January, about 639 “startup unicorns” existed in the United States. A unicorn is defined as a company worth at least $1 billion.

As of January, there were approximately 33 million “small businesses” in the United States.

So the chance of becoming a unicorn is about one in 51,000 or about 0.002 percent. The odds of winning Powerball are worse, more like 0.000001 percent, so if the goal is to get rich, it is statistically better to invest in a startup than buy a lottery ticket.

How’s that for confirmation bias?

Now the stated goal of the venture capitalist is to invest in a company that could become a unicorn — at least that’s what they tell me when I give them a pitch and they tell me that my little company could never be a unicorn, so take a hike, old man.

OK, so look Mr. VC, let’s get real. There are about 1,300 of you, you manage about 2,200 funds with about $122 billion in the banks as of October 2022, and you guys (mostly guys) are all looking for the proverbial needle. Do you really think all of you can get through a single doorway at the same time? I’m just saying — maybe that lottery game is something you and your limited partners might want to take a closer look at.

Now, let’s see how this mathematical insanity affects the entrepreneur. For guidance, we turn to Wharton professor Ethan Mollick’s new book, “The Unicorn’s Shadow.” The book’s thesis: “Not every successful startup was created by a hoodie-wearing genius.” Mollick contends this “startup monomyth” creates adverse outcomes.

In the entrepreneur’s misguided chase to become a unicorn, there is the high risk that he/she makes stupid decisions, ostensibly aiming for a moon shot, and in the resulting flameout misses simply becoming a “successful” company. You chase growth, figuring that if you only lose one penny on each widget, you can always make it up on volume.

Just because the investor/ buyer says he is looking for unicorns does not mean that you have to turn yourself into a pretzel trying to become one.

And just to put a finer point on the issue, most unicorns were not obvious unicorns when they were funded. This mismatch leads to unintended consequences. Now the entrepreneur ends up looking for a mythical beast that might impress some folks in Silicon Valley, hoping they will think that you and your idea could become a unicorn, even though the minting-a-unicorn process is pretty damn opaque at the beginning. It takes time for that horn of plenty to grow, and more often than not, it doesn’t.

Mollick makes the following point. He suggests that the entrepreneur look at the “means at their disposal — what knowledge or connections they already have — rather than focusing on where they (or the venture capital funder) want to end up.” He wants to put to rest once and for all the false narratives that are promoted by the fantasy ecosystem.

Play to your strengths, where you have an unfair advantage in terms of knowledge or skill or relationships. The game is hard enough without going all in and betting against the macro. Remember, the hotels in Las Vegas were not built because most of the guests were winners.

In a nutshell, the craziness of the odds should tell the rational entrepreneur to think in an “evidencebased” way about what problem he wants to solve, does he/she care enough about it to labor long and hard, and can it be sustainable — not necessarily a billion-dollar company, but rather a living, breathing thing that employs people, delivers a product that has a net profit margin, and that you can feel good about when you drive home to your partner and children.

Blank the unicorns, and the horse they rode in on.

On a more optimistic note, Tom Brady has finally retired. The weather is quite nice. The reservoirs have greatly improved from the rains. Sure, we still have a debt ceiling and homelessness and high-interest rates, job layoffs and a looming recession, but when you read a bedtime story to your children, be sure to read them the ones that feature unicorns.

We know they don’t exist — but let’s face it — maybe we’re wrong.