Expectations: Part II
One of the constant challenges to entrepreneurs and ecosystems is the external belief that we are building the next Google. That would be great if it happens, but it is not a prerequisite for success. Creating reasonable expectations for startups is one part of that equation – but understanding the role of a unicorn is the other. In many ways, old style economic development is based on the fallacy of the unicorn. I have coined a couple of new “terms” to potentially identify other types of interesting companies that may be worth watching. Unicorns are important – but ecosystems are built on turtles, rabbits, butterflies, and honeybees.
Butterflies are companies that move around and create network density to improve the overall strength of the network. Strengthening network ties is a critical means of improving an entrepreneurial ecosystem. In fact, one key metric that is often cited regarding the strength or weakness of an ecosystem is the connectivity.[1] They are different from honeybees in that butterflies are not loud – they are noteworthy but they often work to strengthen existing vertical sectors. For example, in Omaha, Flywheel acts as a butterfly. Their service applies to numerous companies in the industry, and overall they raise the connectivity metric of the region. The leaders speak at numerous conferences. They have raised money from multiple cities. They employ people from many different startups and participate in many activities. But, most importantly, their basic service is used by numerous companies regionally and nationally – and helps create customers and connectivity in ways that many other startups do not.
Honeybees are noisy startups that have loud microphones to cross-pollinate ideas. Often these companies are B2C companies and need early market adoption in their home markets to grow. The beauty of these companies is they often act as fulcrums for organizing ecosystems. A good example of how these honeybees can help organize ecosystems is Paul Jarrett in Lincoln, Nebraska. His company, Bulu Box, sells subscriptions to a box containing a variety of supplements and nutraceuticals. He led the movement in Lincoln to #bangthedrum to talk about Lincoln and its ecosystem. In survey results from the Midwest, Lincoln consistently scores high on community identity and entrepreneurial belief. This is due to strong honeybee companies and focus on messaging – led by Paul and others.
Turtles are slow growth stalwarts that serve complex customers with long windows to purchase. So the time and cost to acquire customers is significant. These companies may have long growth curves and need significant capital to succeed. I often think about companies in healthcare, govtech, and fintech this way. In the case of healthcare, they may employ roughly the same number of people for ten years – but never produce significant revenue because the research is still going through FDA trials; however at the end of ten years, the company is acquired at a high exit number because of the IP, both clinical and FDA.[2] Other examples of turtles include companies that specialize in defense or other government contracting.
Rabbits are venture backed start-ups that run out to early success but thereafter plateau or grow more slowly. Hudl, based in Lincoln, is a good example of a rabbit – culturally transformative, fast growing, venture backed, and sexy. Rabbits get ecosystems excited and get people talking about the startup world. But many rabbits are unlikely to ever become unicorns because they target markets that are too small. This helps explain, in some instances, why they have grown out of a nascent or small ecosystem. In the case of Hudl, the company is now more than ten years old and employ between 500-1000 in Omaha and Lincoln.[3] However, Hudl does not make a billion in revenue and likely never will. That’s okay. In fact, in many ways, building rabbits is a great sign for an ecosystem like Omaha/ Lincoln. Hudl is often applauded, and rightly so. They are an economic wealth creator and driver of the economy. More rabbits would be a terrific sign for a community, such as Omaha/Lincoln.
Unicorns are the apex organism of some robust ecosystems – but a robust ecosystem does not necessarily need an apex organism to survive and thrive. To give you a different way to think about the role of unicorns in the overall economy, consider an article from the Harvard Business Review in February which discusses the role of unicorns in the overall public stock market.[4] The total market size of unicorns in the public stock market is only 2%(ish). [Laura (my colleague) wrote a great blog post on the actual article]. This is compared to publicly traded companies and basically highlights how miniscule the overall role of unicorns in the public markets. The problem, from my perspective, is two-sided. Economies are built on small and medium sized businesses – not just unicorns or enormous companies. So, while the economy is currently cycling through an aggregation period where consolidation is occurring (think 1960s consolidation). The HBR article does a good job of explaining this cycle.
New jobs still come from young companies.[5][6] These young companies are not all unicorns. According to a well-reviewed article in “The Review of Economics and Statistics”, firm age is a much more important factor. Young firms (less than five years old) account for 3% of all jobs – but 20% of new jobs in the U.S. Compared to large firms which account for 40% of new jobs and 40% of destroyed jobs – i.e. a net of 0% new jobs. In fact, according to the “Who Creates Jobs? Small Versus Large Versus Young”, nearly all net new jobs in America are created by young companies. Certainly, many of these jobs are in unicorns – but a high percentage of those jobs are in other kinds of young companies – butterflies, honeybees, rabbits, and turtles. And building an ecosystem means building a variety of new types of companies – not just targeting unicorn construction. The reality is that unicorn construction is a by-product of creating a robust ecosystem where other types of companies also grow and thrive.
In fact, many of these companies will be profitable $3-20mm enterprises that create wealth for a small group of people and jobs for many more. Our goal should not be to create ONLY unicorns – but to create personal wealth for founders, investors, employees, etc. Then, when a successful company is grown, the natural cycle of reinvention, reinvestment, and re-creation can occur anew – not just upon the exit of a unicorn.
The reality is that the market cannot support and sustain only huge billion dollar companies. In terms of ecosystem and entrepreneurial vitality, the size of individual companies is less important than their fundamental growth. Thus, from an ecosystem perspective, shift from ultimate dollar valuation to the process of building robust companies is far more likely to nourish companies to become the best and most profitable versions of themselves. This should be our goal – pushing companies to become their best possible selves – even when that is not a unicorn.
[1] http://www.kauffman.org/blogs/policy-dialogue/2015/may/building-ecosystems-starts-with-creating-more-connections - great article with lots of additional information
[2] http://www.nature.com/bioent/2013/130301/full/bioe.2013.3.html - really good review of bio exits in the 2000s
[3] Agile Sports Technologies, LLC filed formation docs on May 16, 2006.
[4] https://hbr.org/2017/02/a-few-unicorns-are-no-substitute-for-a-competitive-innovative-economy
[5] http://www.kauffman.org/~/media/kauffman_org/resources/2014/entrepreneurship%20policy%20digest/september%202014/entrepreneurship_policy_digest_september2014.pdf
[6] http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00288