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Unicorn Hunting: Unveiling What Makes Startup Value Soar
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00:00Sous-titrage Société Radio-Canada
00:04Good afternoon to all of you joining us here in the auditorium at the Purple Stage at Viva Tech,
00:11in person or through live streaming from around the world.
00:15Welcome to our panel discussion on hunting for unicorns.
00:22No, this isn't going to be about those magical horned creatures of Celtic mythology.
00:31This is going to be about those very real but rare companies that achieve valuations of a billion dollars or
00:41more
00:42while being still funded through private equity venture capital.
00:48My name is Amiel Cornell.
00:52I'm a former journalist who caught the entrepreneurial bug about 30 years ago.
01:00After spending some time in Cambridge, Massachusetts, like a gold digger, I headed west to California
01:10where I worked as an entrepreneur, as a venture capitalist
01:14and also started the venture creation practice at a strategy consulting firm in Silicon Valley.
01:22Since then, I came to Paris where I live now.
01:25I've spent the last 10 years living here.
01:28And I'm an independent board director as well as an adjunct professor of entrepreneurial finance at the ESCP Business School
01:39here in Paris.
01:40And I'm also associate editor of the French academic review Entreprendre et Innover.
01:49But enough about me.
01:51Now I'm going to introduce our two panelists.
01:57Let me start with you, Hussein Kanji.
02:00I took out my very special old tech index cards.
02:05So you're a New Yorker who now lives in London.
02:09You spent eight years in Silicon Valley.
02:11Previously, you did stints at Microsoft, three years.
02:15At Accel Partners, the venture capital firm, for four years.
02:20You've launched three startups while you were still in the US.
02:24One of them was a success.
02:25And I would say that's a pretty good batting average in this business.
02:29And at the end of 2013, you set up Hoxton Ventures, an early stage VC firm in Europe,
02:36quote, trying to do things the American way.
02:39So as I understand it, you're trying to bring a bit of the Silicon Valley magic to Europe.
02:46And I'm sure we'll hear more about that in a moment.
02:49Your firm has invested over $370 million to date across 80 investments, leading to nine trade sales and three IPOs.
03:00One of the more successful ones that everyone will have heard of is Deliveroo.
03:06My other panelist is Ilya Strebulayev, born in Moscow, but now also living in Silicon Valley.
03:17And Ilya is a tenured chaired professor of private equity and finance at the Stanford Graduate School of Business.
03:25And as a teacher, I want to acknowledge that Ilya you've won at least three excellence in teaching awards, which
03:35is quite a feat.
03:36So I applaud you for that.
03:39Ilya is also the founder and academic director of Stanford's venture capital initiative, bringing together researchers and practitioners to advance
03:47research and innovation in venture capital.
03:51Ilya is co-author of the bestseller, The Venture Mindset.
03:55If you haven't read it yet, I suggest that you do.
03:59It's an outstanding book published in 2022.
04:02And he often leads executive workshops for business leaders in venture capital on the topic of venture capital, the ecosystem
04:10of Silicon Valley and corporate innovation.
04:15So, gentlemen, maybe for starters, I'd like to ask you, you know, given that unicorns are such rare beasts, why
04:26should a discussion of unicorns be relevant to the average entrepreneur or investor?
04:33Ilya, you've studied thousands of unicorns. How do you feel about that question of relevance?
04:43Well, first of all, what do you mean by rare? It's about one out of hundreds, which means that conditional
04:49getting venture funding, one out of 100 startups will become a unicorn.
04:55One out of 100 venture-backed startups.
04:59Correct. That is correct. So it is rare, but not that rare.
05:05Why it matters. Why it matters for venture capitalists such as Hussein, because his entire returns are about investing in
05:13companies that deliver outliers.
05:15So for venture capitalists such as Hussein, as I said, home runs matter, strikeouts don't.
05:24For founders, if you raise venture capital funding, then the perception is that you would like to become a unicorn.
05:33If you do not have an aspiration to scale and to become a unicorn, just don't raise venture funding.
05:39That is very, very simple. And I think that every single reasonable venture capitalist should not invest in startups unless
05:49they perceive the founders to want to become unicorn founders.
05:57Hussein, not from an investor perspective, but from an entrepreneur perspective, do you feel that there are things that they
06:04can learn from unicorns, whether the success stories or the failures?
06:10Yeah, from an entrepreneurial perspective, the one thing that unicorns have to do well in order to raise those kinds
06:17of capital, to raise that kind of capital and to be able to hire the kinds of people that they
06:21need to do is they have to grow.
06:24And they have to grow exponentially. And so I think there are a lot of lessons and merit for if
06:30you want to step on the gas, basically put a brick on the gas pedal and go as fast as
06:35possible.
06:35There are lots of lessons. There's also lots of calamities. As you can imagine, if you're driving a car like
06:40that, you're much more prone to crash the car.
06:43So there are lots of lessons on what not to do if you're trying to build a company that is
06:47not not going to go for that kind of valuation or not going to go for that kind of scale.
06:51But if you want to get to scale, I would argue unicorns are a perfect place to study in order
06:57to figure out what to do to actually build a business that gets big fast.
07:01Just to add to this, we study at Stanford every single unicorn and then the companies that do not become
07:08unicorns so that we can compare them.
07:11And my team publishes a unicorn report once a quarter where we summarize everything we learned about it.
07:18And indeed, unicorns have a distinctive feature of growing much, much faster than most other startups.
07:26Just to give an example, companies that go on to become unicorns raise the first venture funding about one year
07:35after founding.
07:37Companies that do not become unicorns, they do raise venture funding about two and a half years after being founded.
07:44Companies that become unicorns become unicorns in 3.5 years on average.
07:49So that is a very, very fast growth rate.
07:52In fact, venture capitalists, if they see a company that's been trying to raise money for several years, statistically, they
07:59should not pay attention to this company.
08:01And I think that is also a lesson for founders here.
08:05So a fuel to growth of future unicorns is raising a lot of venture capital.
08:12Not necessarily.
08:14Some companies that become unicorns become unicorns in a relatively small venture budget.
08:20But yes, it is about raising money.
08:23Almost every single company that becomes unicorn does raise venture funding.
08:30Now, what typically happens these days is that companies raise money, a lot of money, but maybe not that much
08:37money.
08:37Initially, then they start growing very fast and to find funded growth, they do need to raise funding again and
08:45again.
08:46So interesting facts.
08:48Average unicorn in the United States raises 6.7 rounds of venture funding.
08:54And the average time between the rounds is about 11 months.
08:57Which means that when my former students, so I have many former students that took my venture capital class and
09:03then go on and try to raise money from Hussein and then become unicorn founders.
09:08When they ask me, Professor, what should I do when I raise my angel round, my first round?
09:14Well, my response is, well, you have to start raising another round.
09:17And about the next round.
09:17You're always in the fundraising mode.
09:19And I think there's a big, it's a correlation, not a causation, but because you have to grow really fast,
09:26you have to fuel the growth.
09:27And the fueling the growth requires money.
09:29And this becomes very circuitous in many ways, right?
09:32Where the companies that raise capital really fast are then able to spend the capital really fast, which enables them
09:39to grow.
09:39Sometimes sustainably, sometimes not sustainably.
09:43And then the reckoning doesn't usually happen for years at a time.
09:46And hopefully the reckoning is a positive reckoning where these companies actually go public and become big independent companies that
09:53drive a ton of the wealth creation in the tech economy.
09:55So I'm going to be, sorry, I'm going to be a bit of a contrarian here.
09:59You know, if any of my students are here or listening, they'll remember that I warned them of the dangers
10:05of capital intoxication.
10:07Of the blind pursuit of raising as much money as one can, raising too much money too fast.
10:14And how that can lead to erosion of good governance, smart decision making, and ultimately lay the seeds of the
10:25failure of that company.
10:27So from your research, Ilya, how do companies, how should companies avoid these deleterious risks of raising a lot of
10:38capital quickly?
10:40So I do say that they raise, these companies raise a lot of funding, a lot of funding rounds.
10:45And they raise funding all the time.
10:47It doesn't mean that they need to raise as much as possible.
10:51There are trade-offs.
10:52If you raise too much, you might not spend your capital efficiently.
10:57Exactly.
10:58And you lose control because you are going to be diluted too much as a founder.
11:02And likely corporate governance may not be as great as it could have been.
11:06But if you don't raise enough, you will run out of cash.
11:10And typically what I tell my students' founders, and the data does support this very strongly,
11:17think not in terms of how much you would like to raise, but how much money you need to raise.
11:22But then include about a 50 to 100% buffer.
11:26So think about, you're raising for the next 18 months.
11:29Have a budget.
11:30What you would like to achieve, what kind of milestones you would like to achieve in the next 18 months.
11:35And then multiply it by, let's say 1.7, 1.82.
11:40And then try to raise that amount of money.
11:44But capital efficiency does matter.
11:47Yeah, capital efficiency does matter.
11:50But I would argue it matters much more in the long term than the short term.
11:53And so in the short term, I think you need to spend money to make money.
11:59But you need to do this in a durable business fashion.
12:02But it's often sometimes not clear what the durable business is until you get to scale.
12:07Because this is a business of scale economics, not of short term economics.
12:10So you're trying to think a couple of steps ahead and hold these two contrarian ideas at the same time.
12:15You may be hemorrhaging cash somewhat foolishly in the short term,
12:19but you have to build a durable business in the long term.
12:21And you have to kind of figure out how to thread that needle.
12:24And then the weirdest thing is our industry and the public market sometimes don't actually understand where value really gets
12:30created in the short term.
12:31So for a long time, people thought WeWork was a phenomenal business model.
12:36We all learned that that was not the case.
12:38But also for a long time, people thought AppLoving, which is now a $300 billion company,
12:42was a terrible business model and was an unloved sector for the longest time.
12:46It's a huge outcome, like kind of powering the mobile ad economy.
12:50But it took years for people to understand that.
12:53So you have to figure out how to raise enough capital to get to where you need to go,
12:58play the long game, but also play the short game to get the capital that you need to be able
13:02to live to fight another day.
13:04You mentioned my book, The Venture Mindset, in which we identify the nine principles that smart venture capitalists follow.
13:13And one of the principles is patience.
13:17Venture capitalists and the founders as well have to be patient.
13:20So there's a short term versus long term.
13:22You have to lose money in the short term to be able to get to the end, to the milestone
13:27of the long term.
13:28I think that is one of the challenges.
13:31So we're in Paris, Hossein investing in the UK and Europe.
13:35I think one of the challenges of the European sense is A, lack of patience.
13:41Two, lack of scale capital.
13:44Because when I say that companies in America raise money all the time,
13:49it's, I think, relatively easy these days to raise angel funding in Europe.
13:55It's relatively easier to raise series A funding in Europe.
13:59It's much more difficult, much more difficult to raise, much bigger capital.
14:04As a result of this, I think what's happening is that the best European and the best UK companies still
14:10have to go to the United States to raise funding and potentially even to relocate there.
14:15I was going to say, and this is the real kind of intellectual conundrum or policy conundrum that we have
14:21in Europe.
14:22Because if you look today on an AI, in just the AI field, which is like the new big field
14:28that's going to drive a lot of growth for us as an economy.
14:31You know, we are 30% more AI engineers than the US.
14:35We're three times as many AI engineers on a per capita basis than China.
14:39So we 100% have the talent.
14:42And there are labs here that prove this, right?
14:45DeepMind is in London.
14:46FAIR, which has met his arm, which is in Paris.
14:49So we clearly have the technical acumen and the intellectual capability to build these companies.
14:55But if you look at what the US has spent in the last five years on generative AI, it is
14:59seven times more than all of Europe.
15:02And you just can't be in this, you can't be in this predicament.
15:06Otherwise, you have to take these companies out of Europe and to the US.
15:10And we, as a firm, actively encourage, it's somewhat contrarian because it goes against a lot of the policy advice
15:15here, is to build greatness, to build really big companies.
15:19You want to be able to take the companies and export those companies as fast as possible to the American
15:25market.
15:25You want to do it to tackle the market in the US because there's just more consumers there and the
15:29more enterprises willing to spend.
15:31But you also do it because that's where the money is and that's where the venture community is.
15:35And unfortunately, the community here, while much bigger than it was 10 years ago, is still not on the same
15:42level as the community out on the West Coast.
15:44It's a deeper, more experienced, more patient, more long term, more big bet oriented economy out on the US market
15:51than it is in the European market.
15:54So, let's continue with this theme a little more.
15:57You know, it seems that roughly 10% of the unicorns that have been created to date were created in
16:02Europe.
16:05Why do you think that is and what needs to change in Europe?
16:09Is it simply a matter of importing the Silicon Valley way to Europe?
16:14I think there are a lot of Europeans who might be offended by that idea.
16:18Is it by training more data scientists and artificial intelligence experts?
16:24The 10% figure is a little bit misleading because if you look, if you adjust that for number of
16:30dollars that go into this economy,
16:32so you adjust it for venture capital available, we're basically on par.
16:36So, what that tells me is if you spend a certain amount of money here in Europe,
16:40you spend a certain amount of money in the US, you get the same output, you get the same number
16:44of unicorns.
16:45We just spend a lot less.
16:47So, it comes back to the money.
16:48It all comes back to money.
16:49Like, you need more venture, you need more scale venture.
16:53Not early stage venture, what we do, but you need more venture to actually put the brick down on the
16:58accelerator and get these companies to grow.
17:01And that is not in abundance in Europe, unfortunately.
17:04Okay, there are a couple of qualifications here.
17:07First of all, we think about the entire supply chain of funding.
17:12And Europe is realistically lacking the exit opportunities.
17:17There are very weak IPO markets, and of course, most of the successful unicorns in the United States exit via
17:24IPOs.
17:25As a result of this, successful European companies either go public in the US or relocate to the US, or
17:32they cannot continue growing.
17:34And I think that, so far, I haven't seen many changes.
17:38The second is...
17:40Just to build on that, and then I'll let you continue.
17:42So, what I think I'm hearing you say is that there's a dearth of exit opportunities,
17:46that it's not as rich as in the United States, whether it be through acquisition or IPO.
17:52Well, I mentioned IPOs. It's the same about the acquisitions.
17:56And, of course, one reason why it's the same about the acquisitions is because, well, there is no French Google,
18:02there is no Italian Amazon, there is no German Google that are about to acquire a company.
18:08And that's part of the secret of Silicon Valley.
18:10At very high valuations.
18:11I don't think it's about just Silicon Valley. It's overall in the United States.
18:15I would push back on that.
18:16I think that's a massive red herring, because I think this is a global economy.
18:20You can easily take a European company and go public in the US. It's not that hard.
18:25There used to be a time where pension holders in any one of the European countries had to invest domestically.
18:31Now they invest globally. That era came and went.
18:33It's a global market. You can take a European company listed in the US.
18:36You can take a European company and sell it to an American buyer.
18:39And it's not the American buyers, just because that's where the tech companies are today.
18:43So you sell small tech companies to big tech companies.
18:47The big tech companies happen to be on the West Coast.
18:49They will shop like the corp dev heads of almost all of the big companies come and meet us and
18:54are looking for targets in Europe.
18:56You just have to figure out how to bridge the gap between the two places.
18:59And I think it boils back down to a capital question.
19:02Because if you don't have the capital, then you have to sell out early.
19:05And that's the European conundrum.
19:07More and more American venture capital firms have been coming to Europe, just as you have, Hussein.
19:12Is that an advantage that they have over European VC firms, that they have the connections, the relationships in the
19:20US?
19:21Massive. But it's not just that. It's that they also are willing to overpay for deals.
19:25They're willing to overcapitalize a company.
19:27And what Ilya was saying was spot on.
19:29You figure out the next 18 months, you put a buffer in, but then someone has to write that check.
19:34The typical European venture investor is like you ask for 18 months, and they whittle you down.
19:39And the problem with whittling you down is if you believe this idea that you have to spend to grow,
19:43and someone brings their check down by 80%, you're not going to have capital to grow.
19:47And this is what the US firms, whether it's Lightspeed or Sequoia or General Catalyst, they all understand this intuitively.
19:53And so it's a good thing that they're actually here.
19:55It's a bad thing for the local venture community, because I think they end up competing with people here.
19:59But I think it's a good thing, because you need that kind of capital to come into the market.
20:04So again, just to push back a little bit, to make it a little bit more spicy.
20:07I think capital is critical, and the lack of capital, especially in the late stages, is really something that prevents
20:17Europe to become much more successful.
20:20But this is not only about capital.
20:23And when I talk to policy makers, including European policy makers, very often they, what I call, lack the venture
20:29mindset.
20:30They don't really understand what it takes to create an ecosystem.
20:36Some of them do tend to think, let's just push 10 billion more euros or 50 billion more euros, and
20:41somehow this ecosystem will appear.
20:44That is not the case.
20:45There are many, many factors.
20:47And by the way, you mentioned importing Silicon Valley.
20:49Do not import Silicon Valley.
20:51You will fail.
20:53Try to, in fact, look at how a number of innovation hubs around the globe, including the US, excluding Silicon
21:00Valley, became successful in the last 20 years.
21:04That is much better to recreate.
21:05So what might be a critical design feature that you would urge Europeans to adopt in order to have more
21:13unicorns, to have more success in venture?
21:16So capital is one, and capital throughout the supply channel.
21:21The second one, I think, if you look at every successful innovation hub that appeared in the last 20 years
21:26around the globe, it's concentrated about university institutions that are designed in a very specific way.
21:34Now, Silicon Valley is around Stanford, but there is something special about Stanford, which is for the past 50 years,
21:42Stanford ecosystem promoted not just students, but also professors and staff to go out and create startups.
21:51What I call commercialization of ideas created in a purely academic environment.
21:57As a result of this, 17%, a little bit more, 17.3% of all American unicorns have a very
22:04strong Stanford connections, which is found as either a Stanford graduate or a Stanford professor.
22:10In Europe, that is not the case.
22:13In Europe, many professors culturally cannot think of themselves of being founders of unicorns, but also the systems, not only
22:22culture, but legal environment, prevents a full-time employee to go out and become a founder of a startup.
22:27So that is maybe a small thing, but it's a critical one, that preventing, I think, many European academic institutions
22:35to become Stanford-like in trying to become the nexus, the center of the nexus of the successful local ecosystem.
22:44So we're going to have to wrap up, but I want to ask the two of you, Ilya, through your
22:48research, you're saying through your work in the trenches, do you feel like you've broken the code on how to
22:54increase the chances of creating a successful unicorn?
22:59Well, look at my unicorn report that my team is preparing once a quarter.
23:03So we identified about hundreds of variables behind each unicorn, unicorn found, and unicorn investor.
23:09And we can predict, there is a lot of noise, as VCs know, but we can predict dozens of variables
23:20that increase dramatically the chances of a company becoming a unicorn.
23:25What would you say, Hussein?
23:27I mean, I don't think it's that hard.
23:29I mean, I know that is rare.
23:30Our first fund had 17 investments, one seven.
23:34We took three of them public at unicorn valuations.
23:36That's a really high hit rate and way better than one in a hundred.
23:38But that's why you're invited on this panel.
23:40Maybe.
23:41So we looked at every single investor, and most investors don't have a single unicorn.
23:48Most VCs are VC investors.
23:50So that is called a selection bias.
23:52I think the challenge with all of this economy is you have to be good.
23:56To become a unicorn, you have to be good.
23:59To become a venture investor, you have to be good.
24:01So looking at the average is just noise.
24:03To conclude, most investors, in fact, have not, as you said, have not broken down a code.
24:11But some did.
24:12Well, that will have to be the final word.
24:14It's been a delight speaking with both of you.
24:17Thank you.
24:17And thank you for the audience, for your attention.
24:22And I wish you a very successful VivaTech.