Why a lot of startups will come to regret their unicorn status

IN JULY 2006 Yahoo, a faded internet giant, offered to buy Facebook, then a fledgling, for $1bn. Billion-dollar offers for startups were then quite rare. “I thought we should at least consider it,” recalls Peter Thiel, an early Facebook backer, in his book, “Zero to One”. The initial reaction of Mark Zuckerberg, its founder, was firmly to say no. “This is just a formality,” he told his board. “We’re obviously not going to sell here.”

Entrepreneurs are supremely confident about their eventual success. They have to be. Startups usually fail; in the vernacular of Silicon Valley, they have a high “kill rate”. It takes unusual self-belief to even set up. Mr Zuckerberg’s was vindicated in spades. Until recently investors were tripping over themselves to throw money at would-be Zucks. Founders were willing to cede certain protections to their venture-capital (VC) backers to get a billion-dollar valuation. They will now regret it. They are, in effect, sitting under a mountain of debt-like claims on their companies.

Take the case of an imaginary startup. WeWhack is a tech platform that connects people who carry grudges to contract killers. (In a bull market for VC, the legal and moral concerns about the business model are dismissed as so much naysaying.) The founder, Mr Soprano, owns all of its common stock. An early-stage VC...



via The Economist: Finance and economics Business Feeds

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