The term “unicorn” defines successful start-up companies, worth $ 1 billion. It was coined in 2013 by an investor named Aileen Lee, in an article at Techcrunch.
Nowadays, seven years later, Alex Lazarow, investor from the same VC as Aileen’s, publishing a book called Out-Innovate: How Global Entrepreneurs — from Delhi to Detroit — Are Rewriting the Rules of Silicon Valley, in which he offers a new model of a successful startup, which he calls “Camel” Companies. Quite the opposite of Unicorn.
Dealing with a Crisis vs Dealing with Multipule Crises
In his book Alex offers a different way of looking how crisis times affect Startups. The book was written following several years of research, which included interviews and examinations of thousands of companies and investors (from Delhi to Detroit). Alex has compared startups in emerging markets in the face of failures. Companies that go through “The prosperous world” type of crises, verses “real” crises in unstable reality, which occurs multiple time in a course of a company, at unstable economies .
“Out innovate” was recently published (March 2020), during the current Covid-19 (Coronavirus) crisis, and its conclusions are ever more relevant. In his book Alex, analyses “Unicorn” companies who started as Startups, and he finds that most of them are losing money at most stages of their lives. Those are companies that require constant funding in order to survive. He compares them with another type of Startups. Companies who manage to get financially balanced, and sometimes even profitable. To the latter type he calls “Camel” Startups. Those Companies succeed (with using the timely investment they raise) to grow and get balanced, and therefore more stable.
The main theme of the book is — how the two types of Startups, Unicorns and Camels, are dealing differently in crisis time, and what happens if multiple crises were to happen to them. His conclusions seem to predicted the current Silicon Valley’s crisis.
Unicorn vs Camel — The basic facts
To explain the book’s conclusions and differences between the two types of companies, I’ll give the following example — while horses (and “unicorns” are actually “enlightened” horses) consume an average of 50–70 liters of water a day. A camel can live 5–7 days without drinking any water, at all. Moreover, the amazing fact is, when a camel is being able to drink again, it can drink only 100 liters of water before it can keep on going to the next point. The water of course, symbolizes the life.
The “Unicorn” companies rely on heavy investors to fund them (frequent “refueling”). However, during a severe economic crisis, as we’re experiencing now, this is a very hard task for VC’s to fulfill, as they were hit as well, and their other portfolio companies. It seems that those Unicorns can only turn to their investors in times of crises, since they were not at all in the process of balancing or trying to make any profit, or live from its incomes. In fact, they were never even required to do so. (See the examples of Uber, WeWork and the like)
By contrast, “camel” companies were built from the start in a different way. They were too required to grow. But their scale was needed to meet financial balance at some point, and even profitability. And Indeed, camel startups rely mainly on their income and profitability. The fact that their past fundraisings were not made only to increase their market share, but mainly to do it in a stable way, where they needed to show when balance is due after such growth, makes all the difference. Those fundraisings was required for future growth and not for daily “survival” as the case for unicorns. And most important, during times of crises camel companies are still affected badly, but not “totally”. The camel companies are in need of funds, but for a defined period, and even more important, it is not “instant” need, or otherwise the company will shutdown. While unicorns need their “daily drinking”, the camel companies can wait for the funds, and practice few more steps that profitable companies can take. Gaining credit lines for crises times, from different financial companies (like banks) is not really an option for unstable Unicorns.
The Silicon Valley Unicorn Challenge
As mentioned, Alex’ book was launched at a time when many articles which were published claimed that Silicon Valley is ending its historic role as a global innovation leader, and that its failure to deal with the current Covid-19 crisis, proves that it is no longer a global role model. A factual survey conducted by the layoffs.fyi website shows that most the 50,000 layoffs in Silicon Valley, came from unprofitable Unicorn companies. Despite of the layoffs, the investors of those Unicorn companies, were required to give them an immediate funding to support their run rate for the following months.
The book shows that at Crises times Unicorn CEO’s don’t really have a “tool box” they could use. Their main tool is to ask their investors for “more money”. The reason is that the CEO of unicorns has never been asked to live on their company’s income, or even reach financial balance. And, as the saying goes while at early stage startup, the company is the “challenge of its founders”, in a unicorn company, the company is “completely the investors’ problem”..
The book’s thesis indicates that compared with the unicorn companies, the “camel” companies had a longer “breathing period” during crises. In fact, the way those companies were formed, enabled them to cope better with various crises, not just one. Mainly, as the camel company did not become accustomed to constant cash flow, it was organized and behaved accordingly. The camel company’s management learned to cope with crises, knowing the last option is to call the investors to inject money. True, in times like the current Covid-19 crisis., the incomes of the camel companies were affected badly, but their needs were not for “survival” funds but more like a limited reasonable sums “bridges” . Can a “reasonable sum” help a Unicorn company to even survive?
Camel Startup can become a unicorn, but does it work the other way around?!
The uncertainty created by the Covid-19, not knowing if there are more viruses to follow, has prompted investors to reconsider their approach. Could it be that the basic foundations of a unicorn needs rethinking? A camel Startup can become a unicorn, but does it work the other way around?. And besides, at the end of the day, during a crises, which are full with storms and high winds — which is better fit, unicorn or camel?
So, as a Startup entrepreneur, maybe next time you meet a potential investor, who asks you “When will you become a Unicorn”- consider showing him that you are actually — a camel..