The term “Unicorn” defines successful start-up companies that are worth more than $ 1 billion. It was coined in 2013, by an investor named Aileen Lee, in an article posted on TechCrunch.
Seven years later, and Alex Lazarow, an investor from the same VC as Aileen, published 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 Multiple Crises
In his book, Alex offers a different way of looking at how times of crisis 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 compared startups in emerging markets in the face of failures. Companies that go through the "first world” type of crises, versus companies from unstable economies who face “real” crises as part of their unstable reality.
The March 2020 publish date for "Out Innovate" came at the same time as the Covid-19 (Coronavirus) pandemic crisis changed our reality, punctuating the book's conclusions as even more relevant due to current circumstances. In his book, Alex analyzes “Unicorn” companies who began their way as startups, later finding that most of them mostly shed money throughout their life-cycle. These are companies that often require constant funding in order to survive. He then compares them with another type of startup; companies who manage to become financially balanced, and sometimes even profitable. These type of more stable startups he names, "Camel" startups.
Lazarow uses this concept as one of the book's test cases, asking - how each type of stratup, Unicorns and Camels, handles itself in time of crisis? As well as asking what if multiple crises were to knock on the door? Judging by the book's conclusions it seems though, he had predicted the crisis currently plaguing Silicon Valley.
Unicorn vs Camel — The basic facts
In order to explain the book’s conclusions on the differences between the two types of companies, I’ll first give the following example — while horses (or their magical horned horse-like cousin the "Unicorn") consume an average of 50–70 liters of water a day, a camel can live 5–7 days without drinking even a sip of water. Moreover, the most amazing camel fact is, that even when the beast does stop for a drink it gulps up only 100 liters before its off again into the sun-beating heated desert.
The “Unicorn” companies rely heavily on 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, with other companies in the portfolio taking a hit and in need of a cash inject. It seems that Unicorns only turn to their investors in times of crises, a lot due to them never being required to target profits or even balance the books at their current stage (i.e. Uber, WeWork).
In contrast, “Camel” companies were built from the start in a different way. They also target growth, however financial balance and profitability are higher up on their to-do list, as their survival relies more on those funds. The fact that their past funding rounds were not made only to increase their market share, but mainly to do it in a stable way, means they need to show financial balance during the process. Those funds are required for future growth rather than for daily “survival”, as in the case of Unicorns. Most importantly, during times of crises Camel companies do take a hit, though not as much as their Unicorn counterparts. Obviously in times of crisis Camel companies are in need of funds, however they can postpone that "need" without fearing that the company will go under. While Unicorns need their “daily drink”, the Camel companies can toughen out the storm and wait for the funds. Obtaining specific 'crisis-time' credit lines from different financial companies (like banks) is not really a feasible option for unstable Unicorns, though the Camels keep on waiting for better days.
The Silicon Valley Unicorn Challenge
As previously mentioned, Alex’s book was launched simultaneously to many articles being published on the topic of, Silicon Valley 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 survey conducted by the layoffs.fyi website shows that most of the 50,000 layoffs in Silicon Valley came from unprofitable Unicorn companies. Despite the layoffs, Unicorn company investors were still required to give them immediate funding to support their run rate for the following months.
The book shows that during times of crisis, Unicorn CEOs don’t really have a “tool box” they could use. Their main tool is to ask their investors for “more money”. The reason for this, is that Unicorn CEOs have never been asked to survive on their company’s income, or even reach financial balance. Further proving the common notion that while early stage startups are a “challenge for its founders”, Unicorn companies are “the investors’ problem”.
The book’s thesis indicates that compared to Unicorn companies, Camel companies had a longer “breathing period” during crises. In fact, the way these companies were built enables them to cope better with a number of different crises coming at once. Mainly, as long as the Camel company does not become accustomed to constant cash flow, it will organize and behave accordingly. The Camel company’s management has learned to cope with crises, understanding that asking investors for more cash is a last resort kind of phone call. True, in times like the current Covid-19 crisis, a Camel company's income is badly affected. Though, the need for funds was never meant for "survival" rather receiving small sums, more for building "bridges". Which brings the question, could a “small sum” even help a Unicorn company survive?
Camel startups can become Unicorns, but does it also work the other way around?!
The uncertainty created by the Covid-19 pandemic 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? At the end of the day, especially during the turbulence of a global crisis, which is a better fit, a Unicorn or a Camel?
To sum it up for all the startup entrepreneurs out there, 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...