The Startup Zoo: A Typology for Founders and Investors
Tobias Kollmann and Lucas Kleine-Stegemann*
Many founders dream of getting not only the seed capital for their startup, but then the additional growth capital in further financing rounds, enabling them to become a large valuable company within a short period of time. Similarly, the investors that are giving capital at the various stages have the same dream because their shares become more and more valuable when the startup is scaling and growing. One magical threshold for such high company valuation is the $1 billion threshold where a startup becomes a so-called Unicorn. Thus and best reached before the initial public offering (IPO), this mythical creature promises a high exit for both the founders and their investors.
However, the problem with Unicorns is that they are difficult to breed, to find, or even to capture in later stages. At the same time, the question arises whether other startups, that do not achieve the Unicorn status, are less worthwhile for the stakeholders, the capital market, or the economy and the society at all. Against this backdrop, the question arises whether there are more startup types worth chasing than Unicorns? After all, this hunt costs investors a lot of money with the uncertain outcome that one really catches a Unicorn into the portfolio. The answer is yes! And this from both a founder and investor perspective.
The first hint of this came in 2017 in the article “Zebras Fix What Unicorns Break” by Scholz, Zepeda, Brandel and Williams, who introduced the genus “Zebra” to the startup scene as the antithesis of “Unicorn”. This refers to young companies that combine profitable growth and social responsibility, ultimately generating at least a stable return for the founders and investors. Therefore, they are not as extremely successful and their reputation does not shine as brightly in the portfolio of a venture capital fund, but the risk of failure is also much lower.
The problem, though, is that the Zebras do not necessarily live up to the high expectations of their investors. They often feel merciless pressure to continue growing in sales and company value. However, if the results fail to materialize and the expectations of becoming a Unicorn are not met, these companies might fail, although they would have a promising future — if the profit interests and impatience of their investors had not been too high. Yet there are more than Zebras and Unicorns and thus startup types that are worthwhile for all parties involved and also produce other exit and return scenarios in addition to an initial public offering (IPO)!
We have found that with the “Horses” and “Cows”, there are two more startup types between the extreme poles of “Zebras” and “Unicorns” (see Figure 1). We gained this insight based on an analysis of data from the German Startup Monitor 2020 on 1,239 startups, where the ambitions of the founders were queried. Using a semantic-differential scoring method, entrepreneurs were asked to name their ambitions regarding their startup in three questions. The questions reflected the following thematic concept: 1) exit vs. ownership, 2) exponential value growth vs. linear value growth, and 3) competition vs. cooperation.
Figure 1: The Startup Zoo
The results open up a broader field both for the ambitions and goals of the founders and for the investment interest of the investors with the related exit options. The Startup Zoo is thus significantly expanded, which allows a more differentiated view of the startup ecosystem. This is significant in many ways. On the one hand, the investors can better manage their portfolio and thus investment decisions, and on the other hand, the founders can better address these expectations and do not always have to follow the “Unicorn-Game” just to get higher investment opportunities.
The Unicorns
Unicorns are characterized by a strong and fast exit orientation and a tough competitive positioning against competitors. They strive for short-term exponential growth and especially want to increase their enterprise value as quickly as possible. This type of startups are often financed with venture capital and operate in winner-takes-it-all markets. Competition is correspondingly intense, with others having to be pushed out of the field. One possible or intended exit scenario for investors could be an IPO or a trade sale.
The Horses
Horses are also characterized by strong growth, but in contrast to the Unicorns, they are much more open to cooperation with other companies and thus accept other competitors in the respective market segment. The network idea and the joint opening of the market as well as the incentive in the mutual race for customers are clearly more in focus. Here again the increase in value for the company plays a major role. These some-takes-it-all markets are also very interesting for venture capital. One possible or intended exit scenario for investors could be a trade sale or a secondary purchase.
The Cows
Cows also want to grow, but perhaps not as fast as the Horses. In addition, they do not necessarily want to aim for a quick exit like the Unicorns. This is due to the stronger orientation towards more or less strong ownership by the founders, who are open to venture capital but do not want to submit to it for a quick exit. The development is perhaps somewhat slower but also more sustainable and more oriented towards a stable return, which, however, also makes them interesting for a portfolio of investors due to the lower risk of default. They often operate in many-takes-it-all markets. One possible or intended exit scenario for investors could be a secondary purchase or management-buy-in/management-buy-out (MBO/MBI).
Zebras
Zebras, on the other hand, are characterized by a clear focus on sustainable growth with an associated longer-term increase in value. The founders and their majority ownership are at the center of the company’s development. They are open to many cooperative ventures and accept mutual competition in which the survival of many market participants is accepted. They are thus oriented toward the symbol of all-takes-it-all markets. One possible or intended exit scenario for investors could be a management-buy-in/management-buy-out (MBO/MBI) or buy back.
Similarly to a regular zoo that is drawing its attractiveness from the presentation of several animal species, the Startup Zoo and thus the associated entrepreneurship scene will increase its attractiveness for founders and investors if there is more than “hop or top” in the sense of only Unicorns or Zebras. The Horses and Cows will enrich the startup ecosystem and we were able to explain what makes them special, what characteristics they have, and what value they can offer for founders and investors but also the economy and society at all.
* Prof. Dr. Tobias Kollmann holds and Lucas Kleine-Stegemann is a member of the Chair of Digital Business and Digital Entrepreneurship at the University of Duisburg-Essen. The authors would like to thank Alexander Hirschfeld (Bundesverband Deutsche Startups), Florian Nöll (PwC Germany) and Julian Ataee for supporting this article.
