What Does It Mean to Be a Unicorn and How to Lose It: 6 Lessons from Failed Startups

Learn what it takes for startups to achieve and maintain "unicorn" status. Explore 6 lessons from billion-dollar companies that rose and fell.

Agata Bauer

Jul 23, 2024 | 10 min read

Achieving "unicorn" status is the ultimate goal for many startups. But what exactly does it mean to be a unicorn, and how can a startup keep that coveted position? Let's dive into the world of billion-dollar startups and explore some lessons from companies that reached great heights, only to come crashing down.

What is a Unicorn Startup?

A unicorn is a private company valued at over $1 billion. Coined in 2013 by venture capitalist Aileen Lee, a slightly tongue-in-cheek term because of the statistical rarity of both the mythical creature and of successful startups. Business insurance provider Embroker puts the chances at just 0.00006%, or odds of about one in 2 million.

Joining the unicorn club is a significant milestone for any startup. It's a clear indicator of a company's potential for disruption and growth, often attracting more venture capital and talent. The role of the venture capital industry and private investors is crucial in this journey, as these funding sources provide the necessary resources for rapid expansion, high valuations and market success.

Fashion companies like Shein or Vinted; financial services like Revolut, Plaid, and Klarna; or ridesharing companies like Bolt and BlaBlaCar are some current private companies to reach unicorn status. Many of the largest unicorns of the last decade are some of the most recognizable brands today. Airbnb, Uber, Spotify and Facebook were all once-small startups that rocketed to unicorn status and beyond, upending their industries on their rise to the top.

While you lose your unicorn status when you're acquired or go public, you can also lose it when things don't go to plan. For every success, there are also failures, and it's these cautionary tales that give valuable lessons in strategy and business development.

The Unicorn Company Phenomenon

While still rare among all companies, making joining the unicorn club a goal has gained significant traction over the past decade, especially in Silicon Valley. This surge is due to various factors, including increased availability of venture capital and rapid technological advancements.

However, the pursuit of unicorn company status has also led to a shift in focus for many startups. The lure of rapid growth and sky-high valuations sometimes gets in the way of building sustainable, profitable businesses. This mindset can lead to risky decisions and unstable business models – a recipe for failure.

Now, let's explore six crucial lessons from failed unicorns to help navigate the treacherous waters of rapid growth and high expectations.

Lesson 1 - Set a Clear Product Roadmap

A well-defined product roadmap is the backbone of any successful startup. It aligns product development with business goals, ensuring that every feature and update contributes to the company's overall vision. For investors, a clear roadmap is a sign of thoughtful planning and strategic thinking --- crucial factors when making funding decisions.

Take Quibi, for example. This short-form streaming platform raised nearly $2 billion but shut down after just six months in October 2020. Despite its flashy content and innovative approach, Quibi lacked a clear product direction and its paid subscription and mobile-only video failed to compete against established companies like YouTube and TikTok.

Part of the problem was that the company never figured out why people needed Quibi. After spending over a billion dollars on what many panned as "garbage content," it wasn't clear why anyone would pay for the service. The company also launched right as the world was heading into COVID-19 lockdowns, in which short-form mobile-only content designed to be watched on the go was not necessary.

Quibi executives refused to adapt the product in the face of actual user behavior and never acknowledged that the kind of content Quibi offered for a fee was what people were already getting for free from other services. This intransigence, coupled with shifts in behavior in the pandemic, contributed to this shortlived unicorn's demise.

The key takeaway? Continuously reassess and refine your product roadmap. Make sure everyone on board understands what the product is and why it's better than alternatives. Stay flexible and be prepared to pivot based on market feedback and changing conditions.

Lesson 2 - Balancing Speed and Quality in Product Development

In the race to become a unicorn, many startups feel pressured to accelerate growth at all costs. This pressure often comes from venture capitalists eager to see quick returns on their investments. However, sacrificing product quality for speed—or blatant fraud—can have dire consequences.

Theranos is an extreme example, but one that demonstrates how badly things can go awry. The biotech startup promised new technology to reduce the time cost of blood testing. As market interest and venture capital flooded in, Theranos shot to a $10 billion valuation at its height in 2014. However, in their rush to market, they didn't have a working product, and lied about it, doubling down on the fraud when the truth came out. The result? A spectacular fall from grace and lengthy prison sentences for founder Elizabeth Holmes and her co-conspirators when the medical community and journalists questioned the company's claims.

Fake-it-till-you-make-it tactics are, perhaps, how many unicorn companies start off, especially to secure venture capital. However, your product does need to do what you say it does. All the more important if it deals with people's health.

The lesson here is clear: while speed is important, it should never come at the expense of product quality. Strive for a balance between rapid development and maintaining high standards.

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Lesson 3 - MVP versus Full Product: Getting the Timing Right

Central to product development is the minimum viable product, or MVP. An MVP allows startups to test their core ideas in the market without investing time and resources into a fully-fledged product. It's an excellent way to attract private investors by demonstrating market potential.

However, timing the transition from MVP to a full product can be tricky. Juicero, a startup that raised $120 million for its high-tech juicer, is a great example of MVP mismanagement. The company invested heavily in an overengineered product before validating the market need or, you know, testing it on real users.

Selling for more than $400, the flashy wifi-enabled Juicero machine promised to be a convenient way to stay healthy and promote "wellness." High-tech rollers in the machine squeeze the packets into your glass. Immediately after launch, it was clear that the juice packs could be squeezed by hand just as effectively, the company lost all credibility and shut down. Apparently, no one, including venture capitalists, had thought why we needed a Juicero. Rather than testing and iterating, they went headlong into a full product without stopping to think about or listen to a wide range of perspectives.

The key is to use MVPs realistically – as a tool to validate your market and gather user feedback before scaling up. Don't get caught up in perfecting features that may not even matter to your target audience.

Lesson 4 - Flexibility in Product Development

For any startup, adaptability is crucial. Market conditions change, new competitors emerge, and customer preferences evolve. Successful businesses are those that can pivot and adapt their products to meet these changing demands.

Friendster, one of the first social networking sites, is an example of this inflexibility. Despite its early success, the company failed to adapt to user needs and fix its performance issues. While competitors like Facebook introduced new features like its social news feed and improved its user experience, Friendster clung to its roots mainly as a gaming platform, ultimately leading to its demise.

The lesson? Embrace flexibility in your product development process. Be willing to change course based on user feedback and market trends, rather than rigidly sticking to your original plan.

Lesson 5 - Aligning Software Development with Market Needs

Creating an innovative business is only half the battle --- it needs to solve real problems for your target market. Aligning your USPs with user needs is crucial for long-term success and continued funding.

Pets.com is a classic example of poor market fit. The pet supply e-commerce site raised millions in three rounds of venture capital in 1999 before going public in 2000. Nine months later, the company folded, becoming one of the highest-profile failures of the dot-com crash. The company overestimated the demand for pet product e-commerce and greatly underestimated its competition. All it really had going for it was a high-traffic domain name. The unicorn company also failed to differentiate itself, and within two years of its IPO, Pets.com shut down.

The key takeaway is to prioritize user-centered design and continuous user feedback. Regularly check in with your target audience to ensure your product is solving real problems and meeting genuine needs.

Lesson 6 - Financial Prudence and Sustainable Growth

While rapid growth can be exciting, it's still important to maintain financial discipline and focus on sustainable scaling practices. Over-reliance on venture capital and private equity funding without a clear path to profitability can lead to disaster.

WeWork is perhaps an example of unsustainable growth in recent years. The co-working space provider achieved a $47 billion valuation but collapsed spectacularly when its IPO revealed significant financial losses and questionable business practices. The company had prioritized rapid expansion over profitability, leading to an unstable business model. A collapse in demand for office space in the wake of the COVID-19 pandemic dealt the final blow.

The lesson? Practice financial prudence and focus on building a sustainable business model. Rapid growth is great, but not at the expense of long-term viability.

Lessons from Failed Unicorns: Best Practices

As we've seen, the path to the unicorn club is fraught with potential pitfalls. To recap, here are some best practices to keep in mind:

1. Maintain a balanced product roadmap focusing on achievable goals.

2. Emphasize sustainable growth, software quality and MVP integrity.

3. Encourage iterative development and continuous market validation.

4. Stay flexible and be willing to pivot based on feedback.

5. Align your product closely with user needs and market demands.

6. Practice financial discipline and focus on building a sustainable business model.

Remember, becoming a unicorn is an impressive achievement, but it shouldn't be the only goal. The true measure of success is building a sustainable, profitable business that continues to innovate and provide value to its customers.

If you're thinking of joining the ranks of billion-dollar startups, we're here to help. Our team of experienced professionals can guide you through each stage of your journey, from MVP development to scaling your startup. Get in touch with us today to learn how we can support your company's success story.