Investors: Stop looking for the next unicorn

Investors: stop looking for the new Facebook

If I had £1 for every time I have heard ‘we’re looking for the next Facebook’ (or similar) as a serious strategy amongst investors and managers of funds, I’d have enough to buy a new diamond-studded saddle for my unicorn.  It sounds sensible while the crowd of stock-watchers are cheering a new emperor, but the whole point about unicorns – like the emperor’s new clothes – is that they don’t exist. To go looking for a unicorn is not being commercially astute – it’s financial folly.

Of course, companies whose value sky-rockets to almost mythical degrees do exist and there are people who make more money than Croesus in the process. But there is a reason those companies are nick-named ‘unicorns’ – they are not creatures you can hunt down with strategy, cunning and resources; very, very, very occasionally they just appear and a few surprised by-standers hit the jackpot. But if you want to find a jackpot winner, your best bet is to head to any one of the vast number of casinos or lottery headquarters around the world. I can guarantee you a multi-millionaire will be made there within days – if not hours.

The Chinese tell a story about a farmer who was covered in sweat and mud as he ploughed his field under the heat of the sun. All of a sudden, a rabbit ran through the hedgerow, over his furrows and headlong into a tree-stump. Delighted, the farmer picked up the poleaxed rabbit and took it home to feed his family. Thereafter, he put on fine clothes and sat idly on the tree stump everyday waiting for dinner to present itself until he and his family finally died of starvation.

Another thing about ‘unicorns’ is that they are almost invariably American. Which means that if we really want to see a unicorn appear in our territory, we will have to make a culture shift: we will need to start taking the risks that are involved in creating an environment that is conducive to unicorns.

Chairman Mao could not bring about an Industrial Revolution in China through the Great Leap Forward of 1958-1961 by having individual families melt down their woks and spades at home.   In the same way, you can’t produce a unicorn in a gro-bag.  The culture of the whole nation needs to change, and you need to be prepared for the unicorn to appear wherever it (not you) chooses.

Facebook, Instagram, YouTube, Google and the like are now multi-billion dollar businesses, able to generate huge profits by leveraging their ubiquity. But to get to that point, these companies had to burn through millions of dollars of investment, building products that did not (nor ever would) generate any direct revenue. This was an extremely risky strategy, which has failed the vast majority of those who have tried it. It runs so counter to common business sense and is so costly that I have yet to see it embraced outside the most debt-laden country in the world.

What drew those unicorns to the world was a pioneering vision and an all- consuming passion on the part of the founders; a determination to work incredibly hard to realize that vision on the part of a growing team of people inspired by the founders; and parents, mavericks and a wider society with extremely deep pockets who were willing to fund it all – not because they were assured of an exponential return, but because they thought the venture worth supporting, even though they would most likely never get any of their millions of dollars back.

All of which means that unless investors in this part of the world are prepared to take immeasurably more risk than they currently are, the only unicorns we can expect to see here will be part of the ‘My Little Pony’ range (which was also imported across the Atlantic).