• Jason Trueblood

We’ve All Heard About Unicorns, But What About Zebra Startups?

Updated: Feb 26, 2020

Spend just a few hours in the startup world and you’re guaranteed to hear the term “Unicorn”.  If you’ve never heard the term “Unicorn,” it refers to a privately held company valued at over $1 Billion.  The term has been credited to a venture capitalist named Aileen Lee back in 2013, who chose the mystical animal to represent a rare but highly successful startup.

While Unicorn startups have been around for the last six years or so, another hot new buzzword for startup companies making its way to the forefront. “Zebra Startups”, in reference to the striped African animal, are far more common than unicorns but are unique and distinctive much like the businesses the animal has come to represent.  Zebra startups are considered to be companies who avoid disruption of traditional markets, have achieved profitability, and target social impact. Mara Zepeda, CEO and co-founder of Switchboard, considers a startup a Zebra if it has a “double bottom line” focusing on profitability and social impact as a measure of company success. Unlike the “growth at all costs” mentality of more traditional unicorn startup companies, Zebras set out to achieve long term sustainability.

As we discussed in “Underperforming IPOs Downing VC Returns”, unicorn startups may garner massive economic value up front, but they typically struggle to sustain or surpass that value, especially in recent months on the public trading floor.  Some of the worlds largest unicorn startups including Lyft, Uber, Peloton, DoorDash, Postmates and Casper Mattress will lose nearly $14 billion this year combined.  With so many mega private financing rounds directed toward these unicorn startups, little is left for small, slow growth, sustainable companies with a mission for impact.

Have the mega (over-valued) financing rounds fostered the creation of the Zebra startup?  We can leave that discussion here for the PHD economists to discuss during their summer research projects.  While profitable and sustainable Zebra startups are a relatively new concept in a world of hyper-growth, Zebras are paving the road for the next generation’s entrepreneurs.  Gone are the days of “unicorn or bust” mentality. Now startup founders have a new choice: grind out the early days, become profitable and fulfill their mission rather then raise financing round after round in the quest for profitability.  Unicorn startup playbooks have been around for at least the last 6 years, however the Zebra startup playbook is being written as you’re reading this article.

The most interesting dynamic between these two types of companies is the different levels of leverage that each hold.  For the Unicorns, if investment stops, the business stops and thus continuous financing rounds are the only option. In contrast, Zebras are profitable (or near profitable) thus additional financing rounds are a growth lever and not a business necessity. This can allow Zebra founders to retain much, if not all of the leverage in their own business and reduce equity dilution.

The question at hand is whether the Zebra startup trend will affect venture capital investing?  Most companies that fit the Zebra mold are in the early stages, thus making them risky investments from the perspective of traditional venture capital firms.  In the meantime, funds continue to focus their capital and attention onto later stage companies, avoiding the inherent risk that comes with early stage investing.  Considering the trend shifting away from early stage investing, it is reasonable to conclude rising Zebra companies are not going to affect venture capital investing for the foreseeable future.

As Zebra companies develop over the next few years and founders desire faster growth, venture capitalists may re-evaluate the investability of these companies.  For now, the ever changing Silicon Valley buzzword dictionary has a new term and aspiring startup founders have a choice between chasing a Unicorn dream or building a Zebra.

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