The Stupidity of Unicorn Mania


The SaaS world is obsessed with unicorns — those companies that have achieved $1 billion+ valuations from investors.

Unicorn status is seen as a monumental achievement.

As I’m writing this, there are more unicorns than ever.

New founder CEOs dream of growing their companies to be unicorns.

Personally, I think it’s all stupid. Let me explain why.

I first entered the SaaS world in 1999. There was an equal, if not greater, obsession with valuation then too. Then, the NASDAQ crashed and tech valuations dropped 70% to 90%.

You see, market valuations are partly a reflection of your business and partly a function of the market.

Interest rates are incredibly low, which forces capital to seek higher returns via equity investment.

In some countries, interest rates on government bonds have been negative.

If you go to an online loan calculator to figure out a monthly payment on a loan with a negative interest rate, you can’t. The calculator doesn’t accept a negative interest rate because, in the history of finance, this rarely ever happens.

It’s like loaning your brother $100k and then you are paying him each month to take your money.

I have a degree in Quantitative Economics from Stanford, and I still can’t wrap my head around that one.

There is more private equity than ever.

More capital has flowed into SPACs (special purpose acquisition companies) recently than the prior seven years combined. These companies raised billions in IPOs, all for companies with no products, no services, no customers, no intellectual property, no employees, no revenues, and no business plans.

There used to be a name for that. It was called “stupid.”

Now, it’s called “a public company.”

The point is that the market is absolutely ridiculous right now. Valuations are equally ridiculous.

There is a temptation to think that if you have an incredible market valuation, you must be doing something right.

While that’s sometimes true, sometimes it’s just a function of the market.

You know what isn’t ridiculous?

I’ll tell you what:

Happy customers. High gross margins. A durable competitive advantage. Over 100% net revenue retention.

What never goes out of style are:

The Fundamentals

I grew up in the 1980s watching the movie The Karate Kid.

This is the predecessor movie to the Netflix series Cobra Kai.

In The Karate Kid, the main character gets bullied a lot and desperately wants to learn karate to defend himself.

He makes a deal with a karate master so he can learn to kick some *ss.

In exchange, the master makes the kid do hundreds of hours of chores: painting his fence, painting his house, sanding the floor of his deck, and waxing (and re-waxing) the master’s collection of cars.

The master is extremely particular. Wax must be put on the car in a very particular way — always with the left hand and always in counterclockwise circles from the center of the body out.

The wax must always be removed with the right hand moving in clockwise circles — from the center of the body out.

And rather than wax the whole car and then remove the wax, peculiarly, each stroke of “wax on” must be met with one stroke of “wax off.”

After days go by, the karate kid is frustrated.

He calls bullsh*t on the master. He thinks the master is screwing him over and exploiting him for free labor, not teaching him any karate moves.

So in a classic Hollywood movie moment, the master sighs as the protégé is about to be enlightened.

The master asks the kid to show, in the air, what the “wax on” and “wax off” movements look like. No matter what happens, the kid must keep doing wax on and wax off.

The kid decides to humor the old man and goes along with it.

“Wax on, wax off.”

“Wax on, wax off.”

In the middle of the repetitive “wax on, wax off” cycle, the master starts shouting and throws a flurry of punches and kicks at the kid’s body.

Miraculously, the kid blocks every move effortlessly.

The karate kid is stunned at his own ability. Unbeknownst to him, he had been learning the fundamentals of karate all along.

Many SaaS founder CEOs have lost sight of the fundamentals. The purpose of a company isn’t to get a high valuation. The purpose of a company is to solve problems for customers extremely well, to do so with high margins, and in a way that makes it hard for competitors to copy.

The valuation is a byproduct of serving customers well.

(And in some market years, the “byproduct” has a mind of its own. Some years, the valuation is manic; other years, it’s depressive.)

At the end of the day, you don’t want all of your employees to focus on the market value of your company. That’s a waste of energy. You want your employees relentlessly focused on finding customers, solving their problems, and doing that exceptionally well in a capital-efficient and highly profitable kind of way.

Forget “unicorns.” Instead focus on: “wax on, wax off.”

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