The New Hot Startups Will Be Camels, Not Unicorns
We’re entering the desert. Which would you rather be?
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.