10.05.2022 Finance International Luxembourg

Unicorn or Zebra: What animal is your startup?

Once upon a time, even the most successful startups were still just called startups… and then Aileen Lee arrived. 

In a very well-known article, Aileen Lee, a venture capitalist based in Palo Alto, California, popularised the world Unicorn, defining a privately held startup company with a value of over $1 billion. In 2017, a “new animal” made its appearance: the Zebra. In today’s article, we will detail a bit more what “Unicorn” or “Zebra” means and who is the real savannah king.

Unicorn: behind the myth, the European reality.  

The term “Unicorn” came to life following a TechCrunch article written by Aileen Lee in 2013, “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.” In this article, she evaluated the software startups founded in the 2000s, and she estimated that only 0.07% of them ever reach a $1 billion valuation. The fact that so few startups managed to reach out the $1 billion valuations meant that those startups were as rare as finding a needle in a haystack, or finding a mythical unicorn, hence the term Unicorn. Since the publication of this article, this terminology has entered into the “common language”. It refers primarily to technology startups, with very high valuations, however questionably supported by their revenue and unit economics. In March 2022, we counted more than 1,000 unicorns around the world. Collectively, they are valued at over $3,516 billion in total. The European Investment Fund (EIF) has listed 147 unicorns worldwide.

The core pillar of the EIF’s equity activity is constituted by the European Investment Bank Risk Capital Resources (RCR) mandate. It is a critical resource that has enabled the EIF to pursue its equity strategy in the venture capital and growth segments for more than 15 years. As of December 2020, the RCR’s portfolio comprises 628 active signed funds, including more than 50 unicorns, and it is continuing to grow. To further attract private investors into the financing of the European economy, and in particular into startups and growing SMEs, the EIF has also developed 2020, a product offering relying on its deep and long-standing expertise in the field of private equity. Confirming a promising start, the AMUF portfolio now includes seven unicorns and has already concluded two successful exits: Inflazome (drug discovery) and Spacemaker (multimedia & design software). Focusing specifically on Luxembourg, the EIF and the Société Nationale de Crédit et d’Investissement (SNCI) set up the Luxembourg Future Fund (LFF) and combined a EUR 120 million contribution from SNCI with EUR 30 million from the EIF. The Luxembourg Future Fund invests directly or indirectly in Venture Capital funds and SMEs to foster the sustainable development of Luxembourg’s strategic sectors, meaning companies active in the ICT, cleantech and other technology sectors, excluding health technologies and life science sectors. The LFF portfolio includes notably the European unicorn Solaris Bank, which has received financing from the LFF with the Lakestar II LP fund. 

From Unicorn to Zebra: for a sustainable future? 

In 2017, another article arrived which would influence how we talk about startups: Jennifer Brandel, Mara Zepeda, Astrid Scholz and Aniyia Williams delivered an essay criticising unicorns for causing societal harm through their rapid growth strategies and presenting the concept of “Zebra”, defining an all-inclusive movement whose focus is on startups building businesses that approach issues from a social impact lens and are focused on generating revenue. They stated that “The current technology and venture capital structure is broken. It rewards quantity over quality, consumption over creation, quick exits over sustainable growth, and shareholder profit over shared prosperity. It chases after unicorn companies bent on ‘disruption’ rather than supporting businesses that repair, cultivate, and connect.”

Only time will tell us if investing massively in an ecosystem of zebras will outperform a portfolio of unicorns in the long term. But in today’s world, it seems reasonable to believe that zebras will become quite valuable as the global society is focusing on building a “regenerative global economy” fit for the next decades to come.