Unicorns – & why they don’t matter

There seems to be an obsession amongst the top universities to look for the Unicorns, startups that have crossed more than $ 1 billion valuation, that have come about from their ranks.  Stanford has over 50, and is far ahead of the other universities around the world.  Does it matter?

Here’s why this doesn’t matter. The kind of companies that become Unicorns are software driven platforms, with a very small number of employees. Since they don’t manufacture anything, they don’t result in a positive impact on the economy by way of suppliers and sub-suppliers, in the way that a large manufacturing company does. The economic benefits thus do not percolate down to the economy. Since there is no manufacturing, there is no expertise build-up relating to manufacturing. This results in further degradation of manufacturing capabilities. If this is magnified to encapsulate and drive the vision of a country, it results in a lower focus on core manufacturing education and skill development relating to this area.

An employee-light company that is very highly valued can have an adverse impact on the region. This is because instead of contributing to the region by way of payment of tax, it can hold the region ransom by threatening to relocate, and often does, to a more tax-friendly jurisdiction. This runs counter to the vision of countries of having successful companies that contribute to the exchequer.

A focus on Unicorns risks ignoring the hundreds if not thousands of companies that are technology-driven and do cutting-edge manufacturing. These companies bolster the entire competitive eco-system. Technology education improves, since they provide well-paying jobs. They employ and provide opportunities to their tech and engineering employees to continue being on top of their game, ensuring that they deserve high salaries. This supports the eco-system, since even if these tech employees leave, they continue to remain in the region and enable other companies to benefit by bringing high-quality manufacturing skills, or start manufacturing companies of their own. It is well-known that manufacturing skills help regions on a more long-term basis compared to service-jobs, which can be replaced more easily and often reach a plateau so far as salaries are concerned, due to the limited value-add that they bring to the jobs. Britain, which followed a service-economy since the Thatcherite era, is a prime example of how challenging a focus on a service-based economy at the cost of a manufacturing economy is to sustain, from the perspective of sustaining the quality of life of the citizens of the nation.

Highly qualified manufacturing capabilities, on the other hand, not only support two service jobs for each manufacturing job, but also become attractive destinations for world-class companies when they consider expanding their manufacturing, particularly if they require highly skilled workers. Switzerland is an excellent example, as is the entire Germanic region of the world. In Switzerland, there is a very large focus on manufacturing and skill-development relating to manufacturing. Not only do companies consider this an attractive location for extremely highly-skilled manufacturing jobs, the high-salaries notwithstanding, but the employment rate, which reflects alignment and relevance of capabilities to the high-end market needs, is in excess of 97%. This, with average salaries exceeding $100K. And that’s for manufacturing workers.

A region that focusses on Unicorns, such as Silicon Valley, may also become detrimental for technology startups, due to the focus on platform startups. This is because investors get used to a high-risk approach, putting huge sums of money in startups, and expect a very quick return. This is possible for platforms, since they scale or implode relatively quickly, often in months. A technology company, on the other hand, takes longer, often more than 5 to 10 years, to begin showing results. The investor eco-system then becomes so tuned to platform startups in the search for the next Unicorn, that they destroy value even if they invest in technology startups. This is because if investors leave a startup half-way before the startup has had the opportunity to hit key milestones, it becomes almost impossible for the startup to get new investment.

Finally, the buzz around Unicorns ignores that since they predominantly are platform startups, the immense valuation is because one company owns the category. However, hundreds, if not thousands of startups are founded with a view to owning that space. The complete dominance of one startup implies that all others perish. This goes against the grain of healthy development of an entrepreneurship ecosystem.

The question being asked is “How many Unicorns have you generated?” But as they say, “Change the question, change the behaviour pattern.” Should we be asking another question?

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