A Few Things I Learned from My First "Unicorn" Investment
Musings from a coder and aspiring angel investor
Recently, I learned that one of my angel investments had crossed into “unicorn” territory. For confidentiality reasons, I won’t disclose the name of the company, and it’s only a “paper gain”, but I thought it was a good time to reflect on my first “unicorn” and some of the lessons to be learned.
Brands Matter
In a world where once-powerful brands (and retailers especially) are sadly declaring bankruptcy at an ever-increasing pace (Sears, Payless, Toys R’ Us, Diesel, Gymboree, Barney’s to name a few), which is in no small part driven by dis-intermediators like Amazon, Facebook and Google, it’s sometimes easy to forget that brands matter.
In fact, I would posit brands matter more than ever because the marketplace is also more cluttered than ever. Whereas real estate is finite, virtual real estate (aka the interwebs) is unlimited and you (the customer) are only a Facebook or Google ad away.
As a result, the “unicorns” that have cut through this clutter and built an authentic relationship with consumers are in extremely enviable positions - I’m talking about companies like Away, Warby Parker and StitchFix — companies where if you saw a pitchdeck five years ago and it said something like “we’re building an online brand in luggage / eyeglasses / styling”, your eyes might have glazed over faster than you could say “sorry, this is outside our wheelhouse but let us know how we can be helpful”. But three unicorns later, it now seems obvious — building a meaningful brand is the quickest path to VC glory, particularly in the consumer space.
I think we’re in the third or fourth inning of the “brands matter” thesis. For example, I would argue that because AirBnb is the “Amazon of p2p lodging”, this also means many other unicorn brands (Sonder being one already) will emerge because they are building distinct brands in a space that can support multiple unicorns. In other words, it’s the brand stupid. (Disclaimer: I’m not calling you stupid, I’m calling myself stupid for not fully grokking this until recently).
Virality, the key ingredient
Ok captain obvious, we get it.. brands matter. Well here’s another one to put in your pipe and smoke — virality is the other necessary ingredient to growing venture-scale businesses. You see, (puts a dunce cap on self) normally it costs money for a seller to get more customers via sales & marketing expenditures. So unless you’re building a product for which there is no competition (unlikely), you’re probably competing against a larger incumbent that can spend, like, way more money than you.
So unless you have orders of magnitude greater virality, you probably have a low likelihood of achieving escape velocity. You might achieve nice growth without it, but you’ll always be held down by some combination of capital constraints or the LTV/CAC ratio or payback period from achieving venture-scale growth.
Enter virality. If your customer gets you more customers for free, that’s a good thing (I learned this in business school). Ok, so back to the Away example (I like using this one because luggage IMO is such a non-obvious unicorn category). Away’s customers love to show off their luggage on the Insta, which is essentially (obviously) free advertising. This helps attract more customers in a category where the incumbents are probably particularly vulnerable (I doubt millennials would describe Tumi as “on fleek”). In other words, Away can build a brand and essentially “own” a customer segment in an extremely cost effective way, something that would likely cost competitors hundreds of millions of dollars in advertising.
At the risk of beating a dead horse (that phrase is awfully morbid isn’t it), it is impossible to overstate the impact that Instagram and other social platforms have when it comes to growing unicorns. I read a podcast this morning that Kylie Jenner’s makeup company has a total of SIX full-time employees. SIX. Obviously, this would not be possible without Insta (and Snapchat, etc), and the ability for Kylie, or your unicorn-to-be to leverage virality in social platforms can be make-or-break.
Do you believe in magic?
The true category killers provide magical experiences. I remember I once waited in line for 12… yes twelve as in half of a day, as in take your most painful DMV wait (maybe 2-3 hrs?) and multiply that by FOUR OR SIX TIMES FOR THE LOVE OF PETE… for an early iphone. I was livid by the time I got to the front of the line, and at the moment hated Apple with the fire of ten thousand suns.
But once they put that iPhone in my hands and I unboxed it and turned it on, it literally took 5 seconds for me to turn back into an Apple fanboy/girl. The whole experience (other than the now-forgotten excruciating 12 hour wait) was magical, the phone, both the hardware and software, exquisite. I was in love.
It’s easy to say now, but companies like Slack, Zoom, Uber/Lyft and AirBnb definitely have it (maybe you’ve forgotten it by now, but try to think back to your first time w/ those products) and up and comers like Notion, AirTable and Ro seem to have that “aha” moment as well. Does the startup you’re thinking of investing in provide that “holy popcorn batman” moment?
So what did I learn?
TLDR: I try to ask myself three questions when evaluating a potential angel investment. What evidence is there that:
a powerful brand already exists here, or is in the making especially vis-a-vis incumbents (think Glossier vs. Revlon)?
the product has achieved the necessary virality to allow it to compete with incumbents with infinitely more capital and resources (think Away vs. Samsonite)
the product provides customers with a magical experience (usually, they won’t shut up about it (example: Superhuman users on Twitter)
Hope this was helpful!