This was the strategy followed by Elizabeth Holmes. She raised about US$700
million from investors, and her business, Theranos, reached a valuation of US$10
billion. Turned out Theranos was very good at the "faking" and not so good at the
"making". The company generated just US$100,000 in revenue before being exposed as a fraudulent operation.
I've attended a few such pitches over the past few months. The entrepreneur has
identified a need; is in the process of developing a business model in response; needs funds to help develop the minimum viable product; exponential sales promised (we're going for growth not profitability); but "you're taking a punt on me".
This is a wannabe unicorn. Startups are raising huge amounts of investment capital
on the back of promises to make a return in the future – but in the meanwhile
building volume is seen as critical. And the returns being promised are generous.
In a way, this might be a more honest approach to potential investors. It obviates the need for the entrepreneur to manufacture a spreadsheet with forecast financial statements based on a set of assumptions - which few investors believe anyway.
With this approach, angel investors need just a few questions: is this an attractive market to go after? Does the business model make sense? Do I believe in this entrepreneur's capability to deliver on the plan? Am I prepared to lose my investment if this doesn't work?
A unicorn startup doesn't have to make money, doesn't even have to show healthy
business fundamentals, it only needs growth and to be priced by investors at more
than a billion dollars.
A beast similar to the unicorn is the gazelle; a fast-growing enterprise, sales of at
least US$1 million and growing at more than 20 per cent a year. Smaller than the unicorn, many gazelles may have valuations well short of a billion. Nevertheless, gazelles are highly prized by economists and politicians because they contribute to jobs growth.
Why the focus on unicorns and gazelles - what about growing profitable SMEs?
A startup is, after all, a failing business - until you make it profitable. And New
Zealand statistics show that four out of five fail. Having angel investors on board
doesn't mean success.
For investors seeking profits there are some interesting animals in the investor
menagerie: the cockroach, the zebra and the rhino.
Cockroaches are companies that, unlike unicorns, aim to be profitable from the start. They focus on costs and generating sales, aiming to be resilient and able to survive under adverse conditions, like their namesake.
Then there's the zebra. As explained by Mara Zepeda, CEO and co-founder of
Switchboard, zebra companies "are black and white": They are for-profit and
also for a cause. Zebras may be B-corps or benefit corporations or companies with
a "social good" purpose.
The rhino, native to Asia, is related to but quite unlike the unicorn; it wants to be
big and profitable. It too has a value of at least US$1 billion but calculated on
a price-to-earnings multiple, not on a revenue multiple.
This talk of different kinds of animals hides a serious problem for many Kiwi
businesses. Start-ups attract a great deal of attention from angels willing to "take
a punt".
Large firms can attract capital via the stock market. Medium-sized firms
can attract the attention of the VC and PE investors. But what about the many Kiwi
SMEs that are profitable and growing (little cockroaches) but not at a rate that will
generate the 10x return (10 times return of capital invested after five years) a
requirement of investment firms? Successive governments have backed the angel
and VC investment markets with hundreds of millions.
New Zealand has myriad SMEs that need investment capital to fund their
expansion aspirations; driven by innovation, importing new plant, development of
new products, or identification of new services. Mostof these are the sort
of companies that will add jobs as they grow. They don't want to become more
indebted, they need risk capital.
Who's backing these smart women and men who have built successful but small to
medium businesses that fly below the popular radar? No one, it would seem.
Surely it's an area for government attention, and not by political slush funds such as the Provincial Growth Fund but by serious endeavours. Perhaps the billions of dollars in KiwiSaver funds should look towards growing the New Zealand economy based upon existing business with whom they can build long term business partnerships.
• Ron Ainsbury has more than 30 years of international business experience as coach, consultant, trainer, researcher and CEO.
