Zebras vs Unicorns.
EDITION 05: INVEST ON PURPOSE
Did you know…
A unicorn, in business terms, is a startup that is valued at $1 billion or more. There are nearly 1500 unicorns globally. These companies are associated with explosive growth and scaling, and often operate with a "growth-at-all-costs" mentality. Examples include Uber and Airbnb.
Unicorns are super attractive to venture capital firms because a unicorn represents the ultimate success story—a startup that can generate exponential returns on investment, potentially turning a modest initial investment into hundreds of millions or even billions of dollars for its investors.
But have you heard of zebras? Zebras are a more recent idea, coined as a reaction to the hyper-growth, high-risk model of unicorns. Zebra companies tend to grow more slowly, but they focus on profitability, positive company culture, and solving meaningful societal problems. Examples are Patagonia and Etsy.
What do we do with this info? Let’s dig in.
Imagine this…
You're an associate at a prestigious venture capital firm, staring at two pitch decks on your desk—one from a flashy AI startup promising exponential growth, the other from a modest climate tech company focused on sustainable, incremental progress. The unicorn talks of potential for hockey stick growth and billion-dollar valuations, while the zebra speaks of steady impact and responsible scaling, challenging everything you've been taught about venture investing. Your colleagues are placing bets on the unicorn, their eyes gleaming with dollar signs, but something about the zebra's grounded approach and clear social mission resonates with a deeper part of you. As you weigh your recommendation, you realize this decision isn't just about financial returns, but about the type of innovation and impact you want to champion in the world.
Is venture capital changing?
Welcome to Venture Capital.
Let’s ground on definition first: Venture capital firms (VCs) pool money collected from investors, such as wealthy individuals and institutions, to invest large amounts of money into high-growth startups in exchange for equity. VCs typically come in at later stages of the startup, and are focused on scaling the company. This is in contrast to what we talked about in last week’s newsletter, where angels support startups in their infancy, often with more personal involvement.
Now, imagine a VC makes 10 investments. Statistically, based on industry research: 7 of the investments will likely fail completely, 2 might return the original investment or provide modest returns, and 1 might become a breakout success that returns 10x, 50x, or even 100x the initial investment. This is why VCs so often focus on unicorns; they only need to make it big with a few investments.
Ok, then what’s the debate for considering zebras?
Stable, sustainable growth: After the uncertainty of the pandemic, investors are placing greater emphasis on safer investments, profitability, and sustainable business models. VCs and shareholders want real—not perceived—value for their investments.
Changing investor preferences: The conversation around impact investing has risen, with more VCs considering the broader social impact of their investments. Many investors are beginning to see value in supporting companies that have a positive societal influence, rather than just chasing rapid growth.
Balanced strategy: There’s an opportunity to consider both growth potential with unicorns and sustainable value creation with zebras to create a more balanced and diversified portfolio that adds meaningful returns while also mitigating risks.
How to apply this…
Venture capital firms’ primary goal is to generate substantial financial gains for the investors who provide their capital, so at the end of the day, they have to focus on investment returns. But as an individual investor, you have the flexibility to consider both financial performance and the broader impact of your investments.
Whatever type of investment strategy you’re currently pursuing, whether it’s stocks, mutual funds, or startups, it is important to think about what type of companies you’re supporting. For those of you interested in public markets, this might mean looking for companies that align with ESG (Environmental, Social, Governance) criteria or sustainable growth strategies. For others, it might mean choosing to support smaller companies or startups that are focused on ethical growth, even if they’re not the next unicorn.
Before making an investment, ask yourself: What does this company stand for? What impact does it have on the world? Does it align with my personal values?
In summary…
The shift from a "unicorn-first" mentality to a more balanced approach offers a new way to think about what success looks like, both for investors and for the world. The true magic may not lie in mythical creatures, but rather in real, striped workhorses that can actually change the world.
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Sources
https://www.pwc.co.uk/services/audit/insights/global-top-100-unicorns.html
