Is our obsession with Unicorns obfuscating our understanding of innovation?
“You don’t get the beauty of Tech Unicorns”. “Unicorns are the future”. Many claim that Unicorns are an economic-, an investment- endgame. They go as far as to claim that Unicorns are what Schumpeter had in mind when he envisioned his economic theory of innovation. Whereas I – humbly and probably wrongly – disagree: I think that our obsession with Unicorns and large tech companies is misleading. While it sounds counter-intuitive, the emergence of Unicorns and large consolidated tech conglomerates is impeding innovation rather then promoting it. It is creating less and less fair opportunities for consumers and customers.
The Economist’s Silicon Plateau
In a recent article, the editor of The Economist touches on the changing – and diluting – prominence of Silicon Valley. Once a proxy for innovation and tech creativity – which made of the region the 19th largest economy in the world – the Valley seems to have reached its plateau. Deteriorating living conditions, with ever increasing living costs, traffic jams and pollution, Silicon Valley sees nowadays a net migration outflow, reversing several decades of net population inflows. While larger corporations and unicorns salaries, are higher and higher, they make it impossible for start-ups to attract talent in the Valley. And sometimes they are not high enough to guarantee their employees a rent: many are the horror stories of software engineers living in vans because they cannot afford to sign such an expensive lease (and of course in plain California fashion, many embraced the #vanlife as a cool and wholesome lifestyle goal). Net, cash-strapped start-ups cannot come close to offer decent living conditions to employees in the area. Considering that, not so long ago, the largest top companies were also fined for their illegal “anti-poaching” practices, innovative companies are having a hard time surviving the war for talent. Not that innovation needs talent (dry humor here). But “of course”, innovation needs cash. And – terrifyingly enough – cash is following talent: Silicon Valley based VCs are investing two-thirds of their seed-money, beyond the traditional geographical borders of the Valley. This is because it’s harder and harder for them to find locally viable start-ups to seed. In other words, VC money is following start-ups elsewhere. And, as a matter of facts, a number of global tech hubs are emerging in Fintech, Insurtech, connected mobility and IOT, which are located in Austin, Phoenix, New York, Amsterdam, Barcelona, Berlin, Singapore and London. The bottom line is that under the gravitational pull of the large stars, there is less and less room for entrepreneurial innovation in the Valley. Thanks to Google, Facebook, Apple and the Unicorns.
So what’s wrong with Unicorns?
Despite the negative impact they have on the ecosystem when they are too close to each other, there is really nothing wrong with Unicorns. There is a lot wrong with the imaginary that is commonly associated with them. Unicorns are unlisted/never-listed-before companies with a valuation in excess of a billion dollar. In this definition, there are no references to the magic world of innovation, despite the mythological allusion that labels them. They are the by-product of a greater number of funding rounds, and, at increasingly higher valuations. Very often the increase in valuation is the derivative of cash injections coming not from traditional VCs. In other words they are the end product of zero interest rates, an appetite for higher returns, and a keen fascination in making money pre-/during- the IPO, in lieu of, post-IPO (although there are strong arguments supporting the notion that Unicorns are purposely not seeking to list their shares on the stock market). Quite naturally the companies attracting such investors are the ones potentially claiming bigger shares of biggest cakes: those are commonly tech players in potentially very big marketplaces. None of this is innovation.
The strange game Unicorns play
Here comes the part, which deals with innovation. Among the most famous tech Unicorns there are peer-to-peer digital applications, tech messaging companies, mobile/on-line payment processing institutions and mobile phone producers. And, most of them rely on a “get big fast” growth model, financed though several rounds of private placements: the more rounds of private investments, the more cash-in; and, with that, an almost compulsive need to spend the cash faster. Uber with nearly 6 billion in turnover in 2016, generated a net loss of 2,8 Billion Dollars. And while a traditional company would focus on turning around, Uber is spending money in lateral businesses (e.g., food delivery and derivatives), or investing in non-core-R&D (e.g., self-driving cars). These investments happen even though in most countries, in which the Uber app is available, they operate at the border of legality. Growing Big Fast is not a strategy about sustainability; it’s built on the assumption that if you create a new market big and fast enough, you will dominate it. As the fairy tail of technology innovation did not include enough dying “evil witches” who had forgotten to put their customers (not their technology) at the core of their business: Nokia, Research in Motion, Kodak, Blockbusters – among the many – all perished in vain, because Unicorns are trying to copy them.
While UBER is not representative of all other Unicorns, it fits the pattern to the extend that even in strategy we refer to uberisation as to the process of providing more economic and efficient services: many market-making new players, explicitly tell their investors they will be “the Uber of…” or “the AirBnB of…” their respective industries, because Unicorns are a neologism for market disruption. Except that we should expect from future market places and technologies to be fairer, more sustainable and definitely more inclusive.
Because of the raised amount of cash, Unicorns also like to buy companies. So they are in the business of buying other start-ups. At Top M&A ranking for Unicorns is Dropbox, which acquired 24 companies between 2012 and 2017: ranging from a publishing platform, to competitors, to streaming applications, link sharing for Chrome users. Second place for Pinterest, with 15 acquisitions in the past 5 years. And while there is nothing wrong with M&As, that’s not the traditional/ collaborative/ open innovation approach.
While Unicorns are often born as tech disruptor, they are also built for size and speed, rather then sustainability and innovation. And while I might “not get the beauty of the unicorn”, we could agree that Unicorns are not representative of how to innovate and how to foster innovation, couldn’t’ we?