Many are of the opinion that the changing venture capital (VC) industry is ending the cult of the unicorn-founder (
and on CNBC — 12/23/19 on Rapid Fire). Others are suggesting that it is time for adults to talk with the unicorn-kids about the reality of life (Time for the Unicorn Talk, Bloomberg BusinessWeek, 10/7/19, page 12). They are pointing out that unicorns with multiple share classes and asymmetric voting rights, that give a few shareholders (usually the founders) control over the company at the expense of the majority of shareholders, will fade since they are not allowed to list on key benchmark stock indexes. Is the VC worm really turning?
Amazon.com (1994), Apple II (the era after Steve Jobs returned to lead Apple in 1997), Google (1998), and Facebook (2004) launched the latest era of worshipping the unicorn-founder. These companies were key to the evolution of VC. Although there were a few exceptions, such as Bill Gates, VCs previously believed that they had to seek control and replace the founder with a professional CEO. This happened in eBay and Apple I. The VCs and the board controlled the venture. The CEOs served at their pleasure. The belief was that the founder was better at launching the venture from the idea stage, and a professional CEO was better at building the venture from the take-off stage.
But the launch of Amazon.com, the resurrection of Apple under the firm control of Jobs, and the success of entrepreneurs, such as Zuckerberg, at launching and building their ventures led to the cult of unicorn-entrepreneurs who were lionized by the press and revered by investors. While the Google co-founders recruited a professional CEO, who was recommended by the VC, one of the co-founders returned to lead the company until recently.
Jobs was a primary catalyst in this hero worship when he returned to Apple and turned a flailing, failing business into one of the world’s great companies. Mark Zuckerberg was also a landmark due to Facebook’s evident potential after he launched it and demonstrated the smarts and the ability to build the venture into a colossus. He was able to attract investors like Peter Thiel and VCs like Accel Partners who were willing to invest in the company while allowing Zuckerberg to keep control via proxy rights.
Now we are seeing some problems in unicorn-land, including:
- The tone-deafness of Mark Zuckerberg, who is not accountable to anyone
- The fall of Kalanick, which resulted in his unglorified exit from Uber.
- The disgrace of the founder of WeWork and the losses suffered by its last VC, Masayoshi Son of Softbank, which seems to be the final straw to end the cult of the unicorn-founder.
These problems are causing many in the VC industry to question whether they went too far in ceding control to entrepreneurs and whether it is time to reclaim it. The question is whether these problems are a result of a lack of VC and investor oversight, or due to the goal of VCs to get a piece of a high-potential venture at any cost – after Aha, when it has proven its potential.
Here’s why unicorn-entrepreneurs will continue to rule – especially after Aha.
#1. VCs need to invest in home runs if they are to succeed. There are very few home runs and any entrepreneur can get funding from nearly any VC after demonstrating proof of potential. The risk of not investing in a proven unicorn is much greater than not investing in one, and VCs are going to compete with each other to invest – even if it means ceding control to the unicorn-entrepreneur.
#2. Entrepreneurs who want to build unicorns and control the wealth (and venture) they create will delay VC until Aha or avoid it. That is what 94% of unicorn-entrepreneurs did. This focus is a 180-shift from the current spend-to-grow strategy among most growth-seeking entrepreneurs to a grow-more-with-less strategy. This would require entrepreneurs to change their attitude from “more-capital-is-success” to “more-wealth-is-success.” They need to know how to be finance-smart – to have the skills to build a real business. This is what finance-smart entrepreneurs like Gates, Walton, and Zuckerberg did.
VCs ask to invest in ventures with proven potential, as happened in WhatsApp. After Aha, the balance of power shifts from VCs to entrepreneurs. The cult of the unicorn-entrepreneur will die only when entrepreneurs stop believing in themselves and their abilities, and seek VC too early.
MY TAKE: Will VCs demand control and reject ventures where the entrepreneur refuses to hand it over? Only if greed is dead. So long as VCs want to pile into ventures with proven potential, finance-smart entrepreneurs who know how to build their ventures from idea to Aha without VC will rule. Will unicorn-entrepreneurs give up control? 94% of unicorn-entrepreneurs did not. They kept control.