As the world’s seemingly insatiable hunger for tech-savvy products and services continues to increase, the pressure on tech companies and startups’ ability to tap into the tech-market has only intensified. Besides struggling to stay a front-runner in the technical development, they have been confronted with new challenges as to how to fund and run their businesses. As a response to this, startups and tech companies alike are transitioning from the land of unicorns to the land of cockroaches.
Although amusing, these buzzwords provide an insight into the contemporary crossroad of investment and funding in the tech industry. So what do these references actually mean?
Referring to the glittering and glorified ponies, unicorns are startups that are characterized by very fast growth, fuelled by venture capital. They are not initially profitable, but the goal is to reach scale first before making profits based on the market shares they have accumulated. Unicorns are also defined as tech companies with valuations of $1 billion or more. A prime example is Uber.
A cockroach, on the other hand, is a creature that can “survive a nuclear war”. This type of startup builds up slowly but steadily from the get-go. At the same time, the startup keeps a close eye on revenues and profits while keeping spending costs in check in order to weather out any funding storms. An example of a cockroach company is Google.
As unicorns are dropping out of fashion, why have cockroaches arisen as the new à la mode, both in Silicon Valley and elsewhere? The simple answer is funding.
2015 was the year of the unicorn. This was because it was characterized by record-low interest rates, which gave tech-companies, and especially startups, access to easy funding. The interest rates also stimulated and pushed more money into venture capital. In return, this encouraged the likes of Fidelity and BlackRock (investment management companies) to try their luck at venture capital investing. This change of interest signifies how investment corporations, who had previously been outside this kind of market, started to make an entrance in order to take part of the prospect of making quick returns of their investments. As a result, a self-reinforcing cycle was created as unicorn companies sought to grow rapidly so investors would continue to invest in them. However, this distracted the unicorns from improving other parts of their business, such as customer foundations and connections, which are essential to maintain competiveness and attractiveness. The unicorns’ success would, as it turns out, be their failure as well.
Amid wobbles in the global economy, 2016 saw a drought in venture capital funding as investors became more hesitant to invest. This was partly due to unicorns and startups’ inability to create the profits required to sustain their level of valuation when investors became stingier with their money. As unicorns based their business models on easy access to venture capital, this shift altered the playing field in a remarkable way. The self-reinforcing cycle was disrupted and growth no longer became the sole basis for gaining access to investments and funding. Thus, the ensuing consequences for many unicorns have been written-down stock values, laid-off staff, or they have been marked down by investors. This has been the case for Dropbox, Evernote and Snapchat. Evidently, this has added more issues for the already troubled land of unicorns. They have had to rethink both their business strategies and organization.
Cockroaches have, as a consequence, arisen as an alternative to unicorns. As Caterina Fake, cofounder of the photo-sharing site Flickr, pointed out, a real life cockroach can go six weeks without food and “can subsist on grease, hair or glue”. Their corporate kin possess this same ability, through which they can get by without big investor infusions and, most importantly, adapt to various economic turbulences more effectively. This has enabled them to “weather out storms”, which their magical counterparts have been unsuccessful in. Although it takes time for cockroaches to grow, many investors perceive their durability as less risky and more stable, making them more attractive for future investments. In the case of Google, they initially didn’t grow by much, but they provided a service to the Internet and slowly built a business around it.
The rise of cockroach companies will see its dawn in the tech industry in 2016. This is the new reality, coming on the heels of ongoing changes in funding and investment on the world market. But whether the cockroach approach remains stable and successful into 2017 remains uncertain as new storms looms in the distance, the biggest one being the economic development in the US under President Trump. As the land of finance is a fluctuating one, it remains uncertain how the outcome of the election will impact tech companies and startups’ funding and investment in the near future. What’s certain though, regardless if the cockroach approach continues to be the prevalent one or not, is that this change will surely affect the way tech-companies and startups run their businesses, for better or worse.