How to become a unicorn: the 5 Ts that venture capitalists are looking for
In the world of innovative companies everything revolves around a single dream: the desire to become Unicorns, startups with valuations of at least one billion dollars not listed on the stock exchange, which often burst onto the scene of the tech ecosystem with bold stories, "crazy" bets and bizarre personalities of the founders. Stories accompanied (also) by an inevitable dose of luck: being in the right place, at the right time, with the right solution.
Now, although the Unicorns in the world of innovation create great attraction and hype around them for the sexy and glamorous aspects of madness, risk and rebellious personalities, it is equally true that there are key elements: concrete and strategic, which have contributed to building success "out of the boxof these companies.
Understanding what these decisive elements are and how they can be replicated is crucial for the founders of other startups, so that they can copy their successful model. With the'goal of attracting the most coveted Venture Capitalists (VC), in the constant eagerness to raise new capital to achieve the coveted status of Unicorn.
Second research conducted by McKinseyout of an interviewed sample of about one hundred VCs and angel investors, what really counts in building the long-term success of a startup (the potential unicorn), are the five T's: Team, Total Addressable Market (TAM), Timing, Technology, Traction. Winning elements always and in any case, to which the VC looks with interest when examining the potential of a startup in which he intends to invest.
ITW/7 speakers
Simone Mancini: "Scalapay? It's an Italian unicorn. Here we create value and pay taxes"
by Eleonora Chioda
The 5 T's of Venture Capitalists to become a Unicorn
The unicorn is a legendary animal, whose image is associated with the concept of rarity, strength and imagination. For this reason, the so-called unicorn startups are to be considered rarities, being highly performing companies in a very short period of time.
For an innovative company to reach a $1 billion valuation is quite difficult: according to estimates, a startup has only a 0.000006% chance of becoming a unicorn, i.e. we are talking about 2 companies out of 5 million, with an average of 7 years. In this regard there are some essential lessons that can be provided to startups in the endeavor to become the coveted Unicorns. Let's start from the lesson of the Venture Capitalists of the five Ts: Team, Total Addressable Market (TAM), Timing, Technology, Traction. Essential elements for a startup to learn to scale rapidly.
digital economy
Satispay closes a 320 million round. Italy has its second billion euro startup
by Archangel Rociola
1ª T: Team (the Team). Do you have experience and a good network?
Invest in people, not businesses. This is the first mantra of VCs, but what kind of people and what kind of team?
- The maverick and the rebel wins over everything. First. Second, the vast majority of successful scaleups (around 75%) have been started by two to three people.
- Teams made up of different founders are best. Complementary skills are the key to a winning team. The perfect mix includes: skills in technology (about 40% of founders), natural sciences (about 25%) and a penchant for business and finance (about 25%).
- University education is still (very) important. The majority of the founders of the top 100 unicorns in the world have an academic degree (over 95%) and more than 70% hold specializations such as a master's degree, an MBA or a PhD.
With education come important networks. And it is interesting to note that more than 70% of the co-founders attended the same university before building their successful startup together. - (Business) experience is essential. It's rare for founders to create a successful startup the first time around. More than 80% of founders had work experience before building their own successful company. And often before that, more than half had already started a business.
ITW 2022
Barbara Caputo: "The next Italian unicorn from artificial intelligence"
by Bruno Ruffilli
2ª T: TAM, i.e. Total Addressable Market (the total market for a product or service): is it big enough to be worth it?
The VC, in order to finance a new business, wants to know if the investment can become large enough to be worth it. The evaluation, in this case, is based on two essential aspects:
- Size (of the market) matters. The industries that "roll the most" have the most successful scaleups. Three industries with annual revenues exceeding $5 trillion: technology, media and telecommunications; industrial activity; Healthcare: These sectors account for almost a third of the top 100 unicorns in the world. Playing in a sufficiently large market, therefore, improves a company's chances of hitting the target. It is equally true, however, that even anticipating market trends can prove to be a real opportunity. One such trend is sustainability, where governments and businesses are projected to invest nearly $10 trillion annually for the next 30 years. With investment areas ranging from green transport to decarbonisation. It is quite predictable that the next new unicorns will indeed be in the climate economy.
A case apart is the artificial intelligence segment which until last year represented a slice of 5% of the market, and which in the space of a few months has monopolized attention on the innovation scene, and attracted investments not only of the most attentive VCs, but also of big techs. - There is a clear growth opportunity. A large enough market is at stake on the table. It is essential that the market offers significant growth potential for newcomers as well. To determine whether a market is "crackable," VCs typically evaluate whether there is an opportunity for a product or service to take advantage of a market weakness. Strong fragmentation is an example of such weakness: if that sector has many players and no leaders, then it may be interesting to invest.
Innovation
The 4 billion-dollar startups in which Arnault, the richest man in the world, has invested
by Alessio Nisi
3ª T. Timing: is it too late, is it too early or is it the right time?
It is said that in the theater timing is everything. Well, this also applies to investments in startups:
- True leaders anticipate trends and capitalize on them from the first moves. Having an eye for new trends and identifying their impact early on enables i "first mover" to be able to step into that industry and build a strong position, which typically translates into higher margins and faster growth for the business. For this reason, startups, which anticipate trends, benefit from greater availability of capital and more attractive valuations. As pioneers in the climate market, for example, sustainable brands and companies with a strong climate focus show faster growth, with valuations two to five times higher than average.
- The startup operates in a two to three year window. VCs look for that spot they call "Goldilocks." The point at which a firm is neither too far ahead of the market to risk dying before it has enough customers, nor too far behind to lose its market opportunity to competitors. VCs aim to invest in startups where the product or service not only works, but also has early indicators of market interest. The expectation of the VCs is that the startups (identified) will cross the innovation curve within two, maximum three years. In keeping with this point, the maximum amount of capital generally raised supports a run rate about two and a half years.
Innovation
How the 3.7 billion European fund works to prevent startups from fleeing
by Gabriella Rocco
4th T. Technology: is it scalable?
For VCs, technology is the key to a company's ability to scale:
- The software is (more) scalable. VC investorsqWhen evaluating scalability potential, they typically want to validate a company's ability to operate efficiently and stably with millions of customers and thousands of employees, while growing at a rapid pace. For this reason they prefer software to hardware, which has complex logistics, maintenance and development profiles. Software, on the other hand, can scale almost instantly if it is well built and supported.
This logic has prompted Enpal, one of the main European players in the green tech sector with a value of over 1 billion dollars, for example, to invest in a completely online purchasing model and develop an operating system and an app that allow customers to manage solar panels, heat pumps and other products, all in one solution. Similarly, Infarm, the world's largest urban vertical farming network, started out with a strong focus on hardware, but then shifted its focus to software. - The technological foundations support scalability. Some VCs have experienced tech teams dedicated to reviewing and evaluating a startup's technology profile and making sure it's scalable. They are looking for, for example, high levels of automation so that costs don't go up as revenues go up.
Tech Test
How is the Asus Zenfone 10, a unicorn in the world of smartphones
by Emanuele Capone
5th T. Traction: Is there a clear path to profit?
There is no doubt that the startup needs time to grow, but VCs want concrete proof that it has taken the right (profit) path. For this to happen:
- The startup has to solve a real need. Too often founders start with an idea or product and then try to find its place in the market. This generally does not lead to success, indeed failure is around the corner. On the contrary, successful initiatives are those that provide unique solutions that change a situation, until recently considered unsolvable.
- Revenues indicate market traction. Venture capital investors expect rapid growth in new business revenues. A European venture capital leader expects start-ups to follow suit"scheme 3-3-2-2-2To demonstrate good traction: Revenues should roughly triple each year in the first two years after founding, and then double for at least three years afterward. Successful startups have at least doubled their revenues each year for eight years.
- The path to profit must be clear. While it is typical for the startup to have net losses in its early years, its path to profit must be equally clear. Venture capital investors generally view client acquisition costs (CAC) and client lifetime value (CLV) as key indicators. Historically, VC investors have viewed the three-fold CLV:CAC ratio on a large scale as a good indicator with strong traction.
To become a Unicorn, a startup must set itself the ambition to solve a problem. To create jobs, add value and innovate. To be equipped with a complementary, tenacious and nonconformist team. Only in this way will it be able to attract the most coveted VCs, and climb to the Olympus of innovation.
