The Unicorn Formula

According to CB Insights, there were 662 unicorns worldwide in 2020 with a cumulative valuation of approximately $2.166B. Entrepreneurs and investors alike often ask themselves, “Is there a formula for creating a unicorn?” With an ever-growing population of unicorns, you might think someone has figured it out. However, it truly is the Holy Grail question—if only you could package and sell it!  

Well clearly it is not that simple: if it were, then we would all build unicorns. As a balance of skill and luck, and heavily influenced by category and timing, there are too many variables to accurately predict the outcome of any venture, let alone every unicorn. Having said that, there are plenty of examples of entrepreneurs and investors alike who have shown an aptitude for picking repeat winners—these are leaders of industry who we would all love to emulate.

So who am I? I am what you might call a serial entrepreneur and have most recently turned my attention toward investing at M13, an early-stage venture capital firm. In my career, I have seen three exits, each larger than the previous but only the last reaching true unicorn status. Most recently I was COO of DigitalOcean, where I helped build the business to $250M ARR over my almost 6-year tenure. The cloud infrastructure provider would go on to achieve an IPO in early 2021 at a valuation north of $5B.

I have had the unique opportunity to have seen the making of a unicorn, and I would say I have learned a lot about what differentiated this third company from my previous ventures that were unable to achieve that high honor. Having recently transitioned into investing, I am now tasked with identifying future unicorns and will now be measured by my aptitude for identifying the patterns that might create one.

Firstly we have to acknowledge that there is no one size fits all, and there exists a lot of variance between categories and models. There are many types of unicorn but a couple key business differences that directly impact how to analyze them:

Is it enterprise vs. SMB vs. consumer?

Does it lean on sales driven growth vs. organic growth? 

Does it require unique single transactions vs. annuity payments over time?

Is the main offering a product vs. service?

For the purpose of this exercise, let me focus on what I know: SaaS or other annuity revenue models, centered around services with an organic growth model generally targeted toward SMBs or consumers. These models are unique in that they rely on a loyal and engaged customer base, but with that they have a great affinity to grow as they stack monthly acquisition on top of an ever-growing user base, creating a highly scalable model.

So is this cheating? Do these characteristics alone solve the search? Unfortunately not! There are other details to assess as you dive deeper into the analysis:

Does the category target highly committed users? DigitalOcean benefited from launching into the largest growing community of professionals who were the most underserved at the time.  But most importantly developers are highly engaged and the platform would be the foundation on which they would build their dreams.

Does the product drive engagement and regular usage? Slack offered solutions into daily habits of working groups in any organization. The number of times in a day that a user would find themselves leveraging Slack to communicate or track actions/activities across an organization are countless, so it was clear that users were engaged and ultimately highly dependent on the platform.

Is the offer moving with the current of user behavior? Zoom was in a prime position to take advantage of a world that was going remote for the foreseeable future, and built most of its value through the lockdown of 2020. Being in the right place at the right time is key to getting that foothold.

Have you built a growth machine with self-propagating growth? TikTok built a machine that simply ingested a tidal wave of users through a self-serve platform coming through word of mouth or referrals. This allows for far more efficient marketing spend and a minimal need for salespeople or expensive acquisition costs. Sales organizations are often complex and expensive while also very difficult to scale—not a great formula unless you have large enterprise accounts.

Can you maintain good operations and good execution? Stripe executes at an incredibly high level, offering a reliable and trustworthy solution to their customers so they stand out from the crowd. When all other variables are in your favor, then it ultimately comes down to execution.

At DigitalOcean, we have often said that we built a machine: the most memorable command I think we ever received from an investor was “Just don’t [mess] it up!” 

We had a highly motivated and growing audience that was heavily committed to the service and were able to manage their own destinies through a self-serve platform that made it easy to onboard and thus easy to grow. The machine was so effective that through whatever trials and tribulations we faced internally and whatever wrong turn caused us months in delay along our journey, the machine kept on working … and growing. We often felt we would still grow despite ourselves, and through the IPO, most of the company’s growth could still be tied back to the characteristics of the machine we built.

There is no perfect formula. Building a unicorn is never easy and never a straight line. But if you focus on the fundamentals and allow the business/product to do the work for you, then it is a far smoother and more predictable ride. But considering how much timing and luck plays a role in the process, I would always advise any founder to “build what you are passionate about” first and foremost. Within that passion, “focus on the fundamentals” detailed herein, and get the “business/product to do the work.”

In all your journeys, I wish you good luck and godspeed!