Illustration: Nick Sheeran

The New Hot Startups Will Be Camels, Not Unicorns

We’re entering the desert. Which would you rather be?

Alexandre Lazarow
Apr 27 · 7 min read

Even before the coronavirus shocked markets, the sheen was starting to fade from Silicon Valley’s obsession with finding, funding, and building the next unicorn — the valley’s nickname for startups valued at over a billion dollars. The collapse of companies with runaway valuations like WeWork and Brandless exposed flaws with the valley’s preferred strategies of “blitzscaling” and relying on VC-subsidized products.

Meanwhile, startups outside Silicon Valley have been proving a different model of success. In emerging markets are companies we can learn from because they have survived harsh business climates with less capital and ecosystem support. These startups are more akin to camels for their ability to adapt to multiple climates, survive without sustenance for months, and withstand harsh conditions. And unlike unicorns, camels are not imaginary creatures. They are real, and they are resilient.

Camel startups survive in unforgiving environments for a number of strategic reasons:

Scaling through the valley of death

In their early days, startups need to spend more money than they earn in order to develop a new product or service and gain customers. They continue to lose money even after they begin selling to customers and generating revenue, as fixed costs may be large, and sales are too small at first to cover operating costs. Compounding this, startups are spending capital to attract new customers.

The classic “valley of death” model describes this phenomenon: Startups might have a good business model but negative cash flow until they hit sufficient sales volume to support their operations and become profitable.

What distinguishes Silicon Valley’s approach to building startups is its prioritization of growth over profitability. The valley of death deepens into a chasm, heightening the absolute need for venture funding for survival — and increasingly ensuring the likelihood of a binary outcome of either massive success or total failure for the company. The figure below explains it succinctly.

Silicon Valley startups raise and spend huge amounts of capital (the curve at the bottom that dips very deep) to invest in growth, often subsidizing the cost to the consumer to drive usage. The hope is that the revenue line will shift upward and increase exponentially. As revenue scales, assuming costs don’t scale commensurately, profitability eventually sneaks past zero (the bottom of the cash curve) and grows rapidly beyond. This strategy can work well for startups that successfully make it through the valley of death by achieving rapid user growth and economies of scale.

“Camel” startups grow in controlled spurts, investing in growth when the opportunity calls for it.

For those that don’t, however, the valley of death can be a place where a company flounders for years, relentlessly pursuing costly growth and raising ever-larger funding rounds with the promise of future profitability until investors’ patience runs out or broader economic shifts — like those caused by a pandemic — force it to collapse.

“Camel” startups remind us that a different model exists. While they still pursue and achieve rapid growth, these startups balance it with other objectives like managing costs and charging a reasonable price for products or services. While many of these entrepreneurs harness network effects and enjoy enviable rates of growth, their scaling trajectory may not have the same perfect exponential hockey-stick curve to which Silicon Valley startups aspire. Instead, they focus on sustainable growth from day one. The cash curve does not dip as deeply. The figure below shows that dynamic.

With a balanced growth strategy, these companies grow in controlled spurts, investing in growth (thus accelerating revenue and cash spend) when the opportunity calls for it. Most startups’ revenue curves have multiple waves, each signifying a mini growth sprint.

Growth is achieved in manageable increments, and profitability is either reached again in short order or is within reach if necessary. Consequently, instead of facing a single, large, unsurpassable valley of death, many Camels cross something more akin to a few shallow ditches of discomfort. The key distinction here is that Camels preserve the option to modulate growth and head back to a sustainable business if needed.

Diversifying to spread risk

Unlike Silicon Valley entrepreneurs who tend to be hyperconcentrated, often with their life savings and livelihoods entirely intertwined with their ventures, entrepreneurs on the frontier often take a more financially prudent strategy — reflective of the complexities of their ecosystems — by building diversification into their geography and product mix.

Take the case of Frontier Car Group (FCG), a leading used-car marketplace in emerging markets. As co-founder Sujay Tyle says, “We spread our risk across the world. We narrowed it originally to five markets (Mexico, Nigeria, Turkey, Pakistan, and Indonesia), which will serve as regional hubs. If they work, we will expand. If they don’t, we have a portfolio.” Some markets, such as Turkey, struggled. Others, such as Nigeria, faced currency crises. Accordingly, FCG toggled the level of investment by geography. In Nigeria, the company limited exposure until the currency stabilized, and shut down operations in Turkey. It also doubled down on what was working. Its strongest geography was Mexico, and from that launching pad, it has now entered four markets in Latin America.

There is evidence that the diversification strategy is effective in building resilience in emerging markets. Research published in Harvard Business Review explains that “highly diversified business groups can be particularly well suited to the institutional context in most developing countries. [They] can add value by imitating the functions of several institutions that are present only in advanced economies. Successful groups effectively mediate between their member companies and the rest of the economy.” In markets where there is less judicial redress for customers who are wronged, a trusted brand helps. Businesses can build on the reputation they’ve gained in one market to establish trust in others.

Similarly, in areas with limited capital markets, diversified players can cross-fund businesses to support high-potential ventures. In markets with limited training, multiline businesses can keep their best talent and offer them valuable experience across the organization. This strategy also helps entrepreneurs mitigate labor market inflexibility (that is, it’s hard to fire people when business needs change) by letting them rebalance human capital across a broader range of activities.

Qualtrics, for example, used their profits to fund growth for many years, scaling at a reasonable rate and declining early interest from VCs.

The lesson should not be about building diversification for its own sake or in an ad hoc manner. Rather, it is about building a portfolio strategically, and when necessary. A portfolio of activities can be both self-reinforcing and self-balancing. Self-reinforcing means that success and learning from one area (say, an emerging best practice for Frontier Car Group to manage fraud) supports the rest of the business. Self-balancing allows for managing risk if any of the segments are not working or are facing particular risks, without threatening the whole.

Thinking long-term

The founders of Camel startups understand that building a successful business starts with a strong foundation that is built to last. For some companies, the founders’ big breaks don’t come for many years. The experience management software company Qualtrics, for example, used their profits to fund growth for many years, scaling at a reasonable rate, and declining early interest from VCs, only raising venture capital when they spotted a significant growth opportunity — a decade after they were established. The goal was never to grow unsustainably and cash out via an IPO or acquisition; instead, Qualtrics took calculated risks and stayed within profitability, even in the early years. The results of these steps were increased founder control, minimal dilution of shares, and eventually an $8 billion acquisition by SAP.

Startups like Qualtrics calculate the costs of balancing growth and risk, often trying to solve for resilience instead of hyper-growth. Yes, this means that exit times are longer, but these companies are able to absorb risks and challenges without going under. Spending on growth when capital is tight forces these companies to weigh different growth strategies against each other and ensuring they don’t bite off more than they can chew. Instead, they have focused growth at a pace that keeps the business sustainable for many years to come.

Camel startups can still grow exponentially, and they don’t avoid growth at all. The key to their success is timing their growth and balancing it against costs and risks. By growing in environments without the same lavish capital resources as Silicon Valley, Camels are forced to steel themselves for tough times.

Of course, this strategy can work in Silicon Valley, too, as a company like Zoom can demonstrate. Zoom raised less than $150 million in venture capital before going public and seizing on today’s demand for videoconferencing to reach a market cap of over $40 billion.

But not every company is Zoom, and for most businesses of every kind, there are rough times ahead. It’s time to fill up our humps for a long and uncertain journey.


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Alexandre Lazarow

Written by

Global #VentureCapital @Cathayinnov, previously @OmidyarNetwork; author of Out-Innovate (HBR Press); professor @MIIS; outdoor enthusiast; raised on the Cdn



Making you smarter about business. A new publication from Medium.

Alexandre Lazarow

Written by

Global #VentureCapital @Cathayinnov, previously @OmidyarNetwork; author of Out-Innovate (HBR Press); professor @MIIS; outdoor enthusiast; raised on the Cdn



Making you smarter about business. A new publication from Medium.

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