How to build a unicorn: Lessons from venture capitalists and start-ups

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How to build a unicorn: Lessons from venture capitalists and start-ups

By Markus Berger-de León et al., | McKinsey & Company | October 19, 2023

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A mythology often grows up around unicorns—start-ups with valuations of $1 billion or more—that burst onto the scene, with stories of bold action, “crazy” bets, quirky personalities, and luck. While these myths may make for great storytelling, underneath them lies a set of facts that helps to explain unicorns’ success. Understanding these facts and how they can be applied to other enterprises is particularly important for CEOs of large businesses looking to build new revenue, bolster resiliency, and court venture capitalists (VCs).  To help incumbents launch new businesses the authors’ research revealed five things that help start-ups morph into unicorns.

VCs looking for companies that have unicorn potential ask five key questions as they evaluate prospective investments. Executives at companies seeking VC support for their new businesses should ask them, too.

Teams: Do they have sufficient experience and networks?  A common mantra among VCs, particularly about early-stage funding, is “Invest in people, not in businesses.” But what kinds of people and in what kind of teams? Analysis yielded four facts.  The vast majority of successful scale-ups (around 75 percent) were started by two or more people.  Diverse founding teams are best. University education still matters—a lot.  Track records and experience are essential.

Total addressable market (TAM): Is it big enough to be worth it? When deciding whether to fund a new business, the VC investor wants to know if the investment can become big enough to be worth it. Assessing the potential comes down to two things: size (The biggest sectors have the greatest number of successful scale-ups.) and there’s a clear market opportunity.

Timing: Too late, too early, or just right?  In comedy, they say timing is everything. That’s equally true of investing in start-ups:  Leaders recognize trends first and benefit from early moves.  

Technology: Does it work at scale?  VCs evaluate whether a business can go from selling and supporting a hundred products to a million without breaking. Technology is often at the heart of a company’s ability to scale.  They focus more on software which help them to go for process automotion e.g., that enable them to scale without increasing cost reciprocially.

5. Traction: Is there a clear path to profit?  The start-up needs time to grow, but VCs want evidence that it’s on the right track.  For this VCs look at whether the business is uniquely positioned to solve a real need. Revenues indicate traction in the market. And The path to profit is clear. 

What can incumbents learn from unicorns and VCs? Two elements stand out.  Set up an innovation board with a mix of experience

2 key takeaways from the article

1. A mythology often grows up around unicorns—start-ups with valuations of $1 billion or more—that burst onto the scene, with stories of bold action, “crazy” bets, quirky personalities, and luck. While these myths may make for great storytelling, underneath them lies a set of facts that helps to explain unicorns’ success. Understanding these facts and how they can be applied to other enterprises is particularly important for CEOs of large businesses looking to build new revenue, bolster resiliency, and court venture capitalists (VCs).  
2. To help incumbents launch new businesses the authors’ research revealed five things that help start-ups morph into unicorns.  Do they have sufficient experience and networks? Is it the total addressable market (TAM) big enough to be worth it?  Timing: Too late, too early, or just right?  Technology: Does it work at scale? And Is there a clear path to profit?

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Topics:  Entrepreneurship, Strategy, Startups, Business Model