What Is the Unicorn Bubble?
The unicorn bubble is an expression that describes a perceived scenario in which the valuation and trade price of startups largely exceeds their intrinsic value.
In such a scenario, the overvalued startups are prone to fail in delivering on the money that was invested in them, prompting severe trade price drops that burst the bubble.
The consequences of this are well-known: wealth destruction, job losses, economic slowdown that spread over the tech ecosystem, risking other sectors to a situation of “financial contagion”.
However - is the unicorn bubble real? Should tech companies and investors worry about the unicorn bubble? As of today, there is no easy answer to these questions - only hints, opinions and interpretations.
The case for a unicorn bubble
In a recent interview with Recode, Basecamp CEO Jason Fried compared venture capital firms to drug dealers, and startups to addicts. What’s the name of the drug? You guessed it right: money.
According to Fried, “venture capital kills more businesses than it helps”, by not allowing them to be smaller, profitable companies instead of demi-unicorns with half-a-billion valuations. Opinions like these will hardly win anyone a popularity contest, but Fried may have a point here. Let’s look at some data points:
In 2018, VC firms invested the record figure of 117 billion on US startups
2019 figures aren’t here yet, but preliminary numbers speak of a similar or slightly lower amount (in other words, 2019 will either be a record year or take the #2 spot in terms of VC investments)
In parallel, there has been no shortage of eyebrow-raising investments during 2018-19, notably:
300 million for a dog-walking app
90 million for an online sports mag
2.2 million for a canned water company
It is clear that VC firms are making it rain. But what on earth goes on when investors throw this kind of money to companies charging $20 for a 30-minute dog walk? What happens is rather obvious: doubts about model sustainability begin to emerge, and expressions like “unicorn bubble” are born.
Unicorn bubble, the ghost of Silicon Valley’s past
The combination of easy money, uneven financial results, and immature business models is well-known: similar factors propelled the dot-com bubble in the late 1990s.
While the dot-com bubble remains fresh in the collective memory, many investors appear to have forgotten about it in their hunt for the next unicorn. As for the companies on the receiving end, let’s say it’s hard to reject a mountain of cash.
Everybody wants to rule the tech world, and money is fuel for that. There are exceptions, but most businesses will take the cash, dole out equity and try their best at ultra-fast growth and, hopefully, juicy profits.
What’s interesting is that even under “normal” conditions, only a few startups will succeed at this. So what happens if the unicorn bubble bursts?
Truth be told, nobody knows, because this is not the early-internet era anymore. Nowadays, tech products and services are deeply ingrained in our lives. Unlike two decades ago, they permeate our jobs, homes, bodies, and cities to an impressive extent.
Take businesses, for example: according to Blissfully, companies with 1-10 employees use an average of 26 apps. For companies with 251-1000 employees, that number jumps to a whopping 124 apps on average.
SaaS has eaten the world and facing the prospect of a bursting bubble, a scary question rises: How far will the damage spread if the bubble bursts?
Offer a great product, and carry a good financial record
A crisis is not a crisis until it actually happens. Before that, a crisis is just a scenario. Still, in the wake of a dot-com bubble-like combination of factors, we believe it is a good moment to be safe now rather than sorry later. We may not be immune, but we are definitely ready, and these are the reasons why:
1. Financial self-reliance
This has been one of Make’s core principles since the very beginning. A company that cannot rely on itself to maintain and grow its operations is exposed. That doesn’t mean we don’t take risks; we simply don’t take them to an extreme.
2. A diverse userbase
Big clients are great. We love big clients. We want big clients. What we don’t want is to rely on a handful of big clients. The mechanics behind this is pretty straightforward: if your company depends on a big client to function, your company is partially absorbing that client’s risks.
Thus, if the client falls, your company can become trapped in the dragnet. Fortunately, we have all kinds of users: Make has been adopted by corporations, SMBs, and individuals, totaling 200,000+ users to date.
We are proud of having an expanding, incredibly diverse userbase making the most of our product. As the saying goes, never put all your eggs in one basket.
3. A talented, global team
Roughly half our squad is distributed across the world. For us, the benefits of this are pretty clear:
We are not burning through cash by paying Silicon Valley’s wages
We don’t rent ludicrously expensive office space.
Our talent pool is not a city or a region, but the world
Sourcing global talent has kept our operative costs in check while providing flexibility, coverage, and diverse views on many relevant topics.
4. A sustainable growth strategy
Make has been growing at a steady rate since it was launched in 2016. When it comes to growth, we like to walk the middle road:
Draw ambitious, yet achievable goals
Keep costs in check
Take good care of the customer, always
Take care of the product, always
Growth is the main talking point at countless startups, and it’s a central part of our strategy as well. However, there’s a limit: we are not to burn our ship in order to reach the port.
5. A stellar product
Our product is our core strength. We can adjust everything else as much as we want, but without a product that delivers immense value to the users, it would not be enough. In addition, even in a worst-case scenario - say, half the startups going up in smoke - the surviving companies would still need a product like Make.
Fast, reliable, cost-effective integrations have a huge intrinsic value, and that’s what Make provides. What’s more, in a scenario where investment is halted, automation would become an even more pressing need.
When there’s no more money to burn, it is reasonable to expect a surge in demand for the productivity gains workflow automation offers.
Predictions of imminent doom have been a constant in the tech industry during the past decade. We see it all the time: the fintech bubble, the sharing economy bubble, the crypto bubble, the unicorn bubble, the AI bubble.
Next time you know, it will be the quantum computing bubble, or perhaps even the automation bubble. Anyhow, none of the aforementioned examples resulted in a market crash. There have been slumps and some spectacular failures, but not full-blown bursts.
Does this mean companies should ride the money wave until it grows flat? No, of course not, but even so, this is what many startups do. In the meantime, two things are certain:
Investors will want their money back
When a crisis hits, companies on a good footing have more chances to survive
As for the unicorn bubble, there’s no point in panicking, but maybe it would be wise to save for a rainy day.
The only advice we can provide is pretty simple: choose your tools wisely, and always go after value.
The rest, they say, is confetti.