The Business Model Problem With Unicorns

There is a fundamental problem with Silicon Valley – too many startups seem to have a business model of “build to flip”. This model – which I’ve seen in the past – is a model in which the company has little, if any, interest in creating a serious, viable product, and is instead only interested in selling out to someone else. The short term thinking reminds me of the 1960’s movie musical, “The Music Man”, where a scam artist plans to sell band instruments to locals in “River City” and skip town as soon as they pay for the horns. One can see the signs of excess in the news – sex and shots in the stairwells at Zenefits, and magazine covers which show the hundreds of “unicorns” (a slang term for a private company valued over $1 billion) running for the exits, and most finding that there is no way out. When MVP describes a “minimum viable product” instead of a “most valuable player”, it’s a sign that the valuations may have “jumped the shark”.  The reported “shots and sex in the stairwells” at Zenefits will be the punch line for the bursting of a modern day valuation bubble, just as a certain sock puppet was a symbol of an earlier period of excess.

This focus on market capitalization instead of net income – or even producing a viable product – is a particularly intractable problem for items in the financial technology (“FinTech”) sector, where the industry actors (accountants, financial institutions) thrive on long-term stable relationships with customers, and mistakes are remembered for decades. Unlike other sectors of the economy, entrepreneurs are interested in dealing only with “grown ups” when it comes to their business finances. The constant change in features and application availability makes the users hesitant to adopt any solution from these companies, whose constant product and business model iteration makes their customers feel like they’re living a very strange version of Abbott and Costello’s “Who’s on First”.

There are opportunities out there – some such opportunities include automation of account assignment to transactions imported from banks, automated reconciliation of statements, and creating “digital plumbing” to solve the problem of digital silos in the very fragmented cloud economy.  Unfortunately, these tasks are not easy – which is why nobody is doing them successfully.  (I hope someone solves these problems soon.)

It also strikes me that there is excessive focus on HOW the products are delivered (e.g. browser/public cloud) instead of WHAT the products actually do for their users. This is accomplished by burying prospective buyers in a blizzard of BS before they buy. A partial list of “danger words” which indicate that this style of groupthink may exist includes cloud (all kinds), user experience, ecosystem, seamless integration, minimum viable product, iteration, market capitalization, and non-GAAP operating results. If you hear most of these words, I’d stay away – or at a minimum, hold onto my wallet. The unicorns are running for the exits, and I fear that some will be trampled as investors realize that they have bought into applications without a viable long term model for operating as a profitable business.