Reading: Stop talking about unicorns: The way we measure European tech success needs to change6 minutes
Stop talking about unicorns: The way we measure European tech success needs to change
What metric best quantifies a healthy startup ecosystem? Christian Owens, co-founder and CEO of the scaleup Paddle, believes that the European tech ecosystem’s emphasis on unicorns is misguided and shares his thoughts on what should be valued instead.
Since Aileen Lee coined the term ‘unicorn’ to refer to a startup worth more than $1bn in 2013, the word has come to dominate discussions about the health of the European tech industry. As Ms. Lee stated in her article, “many entrepreneurs, and the venture investors who back them, seek to build billion-dollar companies” and noted how this is driven in part by bigger venture funds needing larger exits in order to deliver acceptable returns.
As the term entered the mainstream, it’s become the default way to assess both an individual company and, more broadly, the comparative strength of the European tech scene. Questions like ‘Are you a unicorn yet?’ ‘How many unicorns is Europe producing compared to the US?’ and, ‘who will be the next ‘decacorn’?’ now come up in almost every conversation about or with European startups andtech investors.
This is particularly true in the software-as-a-service (SaaS) industry we at Paddle operate in. The increase in software purchases driven by the pandemic has meant the global SaaS industry has experienced meteoric growth over the last 12 months. To put it into context, the kind of growth the SaaS industry saw over the first nine months of 2020 was equivalent to what we would expect to see in three to five more typical years. As a result, there is a lot of focus on which software startup is going to become the next UiPath or Celonis.
As a metric, tracking the number of European unicorns is completely understandable, and it is undoubtedly positive that the number of billion-dollar companies founded in Europe has risen so dramatically over the last decade. However, the number of unicorns is just one datapoint and there is danger that, by using the number of European unicorns as the basis for measuring the success of Europe’s tech industry itself, we fundamentally misunderstand what a successful tech ecosystem should look like.
The health of an ecosystem isn’t defined by the ‘apex predators’
There will always be a lot of hype about those companies that experience a hyper-growth trajectory and reach high valuations in a short period of time. And that’s not surprising, because it is so rare and some of the figures released now are truly eye-watering. They’re impossible to ignore. But the untouchable “apex predators” of the tech industry, the likes of Microsoft, Google and Salesforce, are not the companies that define the success of the whole ecosystem.
Rather, it is actually the smaller players and the extent to which they are able to launch and scale successfully that truly matters, and says more about the strength of the ecosystem as a whole. You could have dozens of new European unicorns every quarter, but if we didn’t also have hundreds of smaller, highly innovative companies driving growth, creating jobs and pushing boundaries then it would be a very different picture.
A better assessment of Europe’s tech scene would be to look at how many of these small businesses are becoming successful rather than obsessing over when we will produce the ‘next Google’. Too often, by focusing on the number of unicorns, our analysis of Europe’s tech ecosystem overlooks the huge number of great companies across the continent that are building fantastic products, delighting their customers and growing rapidly, albeit at a smaller scale.
The growth in SaaS is being driven by small players
As a business focused on helping SaaS companies to scale successfully, our team at Paddle has seen first-hand how this trend is shaping our own industry. The SaaS sector is growing incredibly quickly, and much of this growth is being driven by the rise of smaller software startups focused on tackling specific verticals.
Software is now easier to build than ever and that has led to greater specialisation in the types of products being built. There are now thousands of smaller SaaS companies founded every year that are carving out a lucrative niche by building incredible solutions that solve a very specialised problem in a considerate way.
Although this approach might mean their offering will have a lower natural ceiling than some other companies, the fact that a SaaS company can build a product and sell it anywhere in the world means that many of these hyper-specific companies do really well; growing fast, achieving market dominance, building an incredibly loyal following and often getting acquired by more established platforms. For instance, Kaleido, a company based around a great product that solved a very specific problem – a drag-and-drop background removal service for images and video – was acquired by graphic design platform Canva in February for an estimated $100m.
We’re seeing more and more companies entering the industry in a similar manner: bootstrapped, with discrete, specific goals. Many of these companies may not have the total addressable market to ever reach unicorn status. Still, as the barriers to building great software and selling it globally continue to come down, I fully expect this to become one of the main drivers of growth for both the SaaS ecosystem and the European tech industry for years to come.
We need to start talking more about Minimum Viable Market
It’s time for a mindset change. Too much of a focus on unicorns can lead to a damaging belief among young founders that the only route to success is to build the next industry giant.
What these founders don’t realise is that, before you scale, you have to survive. The reason most companies fail isn’t anything dramatic, it tends to be false starts on the journey to scaling. It could be prematurely trying to hire a huge team, investing real money into channels which aren’t working or scaling or not getting to product/market fit before you start investing.
Instead, many would benefit from focusing on what specific part of their offering their customers love, or their “minimum viable market” and catering to that. MVM is the smallest possible market you can serve and that can sustain your business as it grows. It’s about targeting the people who will particularly benefit from what you are offering.
This isn’t about limiting your ambitions. It’s about recognising that, ultimately, it all comes down to what counts as success for you personally. If the change you want to make happen requires you to build a gigantic, era-defining company then of course you should go for that. But if your aim is to create a great product and to solve a real problem for a smaller group of people, in order to never have to worry about money again you don’t necessarily need to build a $3bn company. Having a lower ceiling for valuation might put off the big VC funds and mean these companies are less likely to get the big Series A rounds or deliver seismic IPOs, but it does not prevent a company from being incredibly successful on its own terms.
The term “unicorns” is without doubt here to stay, and I am not saying that it’s not a meaningful way to evaluate the maturity of an individual business. But, when looking at the big picture, the perception that a company is not successful until it reaches a billion-dollar valuation is distorting our view of the European ecosystem overall. We should value and recognise the contribution of a growing number of amazing smaller companies doing great things, building great products and in the process encouraging ever more people to consider a career in tech or entrepreneurship.
It’s something we’re seeing in the Saas industry already – companies focusing on their minimum viable market and delighting their customers and still achieving success, contributing to a boom in global Saas growth. If we really want tech to be the driving force of economic growth in Europe, then we’d do well to talk less about unicorns and more about how we can encourage these smaller players to survive and thrive in a truly diverse and self-sustaining ecosystem.