Camels, Unicorns and the Next Billion
Plus why affordable smartphones aren't enough
This is a newsletter about innovation in—and beyond— Silicon Valley. From São Paolo to Seoul, Lagos to Lima, I write about the ideas, companies and people that are rewriting the rules of innovation and entrepreneurship. 🌎
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Business models that work for the Next Billion
Given its aura, it may seem hard to believe that Global Entrepreneurs—from Delhi to Detroit—Are Rewriting the Rules of Silicon Valley. Yet that's the title of a recent book published by Alex Lazarow and with whom I agree: in fact it's the premise of this newsletter.
Since Aileen Lee coined 'unicorn' to characterize startups valued at +$1 billion, the idea and its allure of disruption, has embedded itself in Silicon Valley mantra and popular imagination. In 2020, we can count more than 420 unicorns around the world compared to 39 in 2013 when the term was first coined. And, it is not hard to see why, according to Quartz's Anisha Sircar:
Lazarow likens Silicon Valley’s unicorn-hunting strategy to mortgaging your home to buy three new homes: If things go well and the market moves in the right direction, the rewards are massive. (Case in point: Facebook.)
At its simplest chasing unicorns is an extremely high risk, high reward game. It is hard to fathom the cost of missing out on the 'next big thing'. But most of the time, it is not the best strategy in other innovation ecosystems.
🦄Unicorns exist, but are delicate
Unicorns are not only hard to come by, they are struggling. Recent coverage of unicorn darlings like WeWork have put into question Silicon Valley's business model of growth at all costs (blitzscaling). For context, between 2016 and 2019 WeWork accumulated losses to the tune of $220,000 an hour.
🐪Camels are real, and really sturdy
'Blitzcaling' doesn't work as well outside the valley. In fact, entrepreneurs elsewhere have long been building successful enterprises on a sturdier model: 'Camels'. According to Lazarow
Around the world, the best entrepreneurs are taking the opposite approach [to unicorns]. They're saying, 'I want to have sustainable economics from the get-go, manage costs, and still scale, but scale responsibly [camels]
In particular, Camels have the ability to scale quickly—albeit more slowly than unicorns— but to do so profitably. They need not subsidize their services with Venture Capital funding because they are playing the long-term game.
The easiest way to visualize this is to take 'valley of death' model where start-ups face negative cash flows until they reach the right scale to support operations and turn a profit.
Chasing unicorns means that firms will spend aggressively to drive growth no matter the cost creating the 'chasm' in the cash curve below. Camels will grow prudently and raise funds when necessary all the while optimizing for profitability and sustainability. Camels still face the 'valley of death' but venture into it more carefully and prudently.
I've taken a stab the showing you the difference between a camel and a unicorn with real-world data and the chart above: a comparison of Zillow (🦄) and Atlassian (🐪).
For context, Zillow is an internet-based real estate company managing several online marketplaces for property founded in 2006 which went public (IPO) in 2011. Atlassian is an Australian-borne software company that helps teams work together and effectively though software tools founded in 2002 and that IPO'd in 2015. Both have been around for a while, but only the camel is thriving...
What is most important to note is that while Zillow has grown its cumulative revenue much faster than Atlassian, it has not quite gotten past the 'valley of death'. Zillow is still cash deficient, and pursuing rapid growth but without achieving stable and prudent profits. In essence, Atlassian has not been using capital to subsidize its growth but has instead managed to continue growing while earning cash, being efficient. Will it take longer for Atlassian to reach similar revenue thresholds? Yes. But it also means it's in a better place to take on any disruption from Covid-19 without needing to seek additional funds. Now, I admit this is an imperfect comparison but at least one that helps convey the point.
What does it mean for the next billion?
As we enter a desert in the post-Covid-19 world, it is the camel that will ride out the drought. Outside of Silicon Valley, the economies of 'blitzscaling' just don't add-up: financial capital is more scarce and there is much more scrutiny on creating a profitable business model. Camels need to be efficient from day 1, because they often work in inefficient markets at the frontier. Lazarow outlines it as follows:
Frontier innovators manage costs, charge for the value they create from the get-go, ingest capital on their terms, understand the levers for action, diversify the business plan and take a long-term view
While there has been a large increase in VC funding across key emerging markets the likes of Latin America, Africa and South East Asia we should not expect this to be coupled with an imitation of the Silicon Valley growth model. Instead, the stresses imposed by Covid-19 on start-ups means that many more will seek to become camels. I believe that the companies serving the next billion internet users in emerging markets will be prudent but fast-growing camels.
Sources on—and more resources about—Camels
These are some of the articles I referenced when writing this article, I hope you will find them insightful!
Quartz - Why Silicon Valley is no longer the global model
Kauffman Fellows - Silicon Valley Camels, will you please stand up
Inc - Why more startups Should Aim to be 'Camels' than 'Unicorns'
📱 Smartphones are not enough
There are nearly 3.5 billion smartphones in use today. As the Next Billion(s) comes online, that figure is expected to rise significantly. Cheap smartphones are great, but the real limiting factor is the data cost.
This week I came across the above stunning illustration from Visual Capitalist. It looks great, but quite frankly is very misleading. For example, the graphic highlights Canada's high cost where 1GB of data costs you $12.55:
Canada's high cost for data can be explained by its high market concentration. In 2018, Bell, Rogers and Tellus collectively had over 82% of all wireless service revenues
But, for an average Canadian $12.55 for 1GB is actually quite cheap when you consider their disposable income. Let's look at two countries with a similar cost to illustrate: my native Bolivia ($5.09 per GB) and Portugal ($4.97). For Bolivia, 1GB of data represents 2.2% of monthly Income whereas that represents 0.02% for Portugal. As for Canada, that hefty $12.55 price tag is equivalent to 0.03% of monthly income. Beyond that, the speed of Bolivia's internet connection is likely to be well below that of Portugal and Canada, meaning you are not really getting the same service.
Visual Aid
A head-to-head comparison of mobile payments vs. card payments in India (S&P Global)
→ Mobile payments are growing at a faster clip than credit cards, particularly in offline retail (paying with a digital wallet in a store)
→ Last week I covered why digital payments beat out plastic
Quick Quirks
💰 Covid-19 seems to be catalyzing financial inclusion in Colombia. According to S&P global more than 2 million Colombians have recently opened a bank account during the coronavirus pandemic, a figure that is much larger than the 1.4 million bank accounts opened throughout 2019. This is a big move in the struggle against informality—the existence beyond legal and regulatory frameworks like social security benefits and bank accounts—that is a hallmark of many emerging economies. It seems this influx was precipitated by the country's decision to distribute emergency welfare payments by opening new bank accounts for citizens.
🌍The African Venture Capital ecosystem continues to show strong performance despite disruption from Covid-19 and lockdowns. While the pandemic has led investors to shift towards health and AgTech start-ups, it does not seem to reverse the trend of increase capital in the continent. This is a useful rebalancing given the historic concentration of VC funding in the region to consumer and financial enterprises and the gawking neglect of healthcare.
🚩Pinduoduo's Colin Zheng Huang is stepping down from his role as CEO, but not fully withdrawing from the company. The E-commerce start-up takes advantage of China's prowess in manufacturing cheap goods to help shopping groups source big discounts on basic goods. Though stepping down as CEO he will retain a significant share of voting rights. Nonetheless, investors and regulators welcome the act as a prudent action given the fact Colin played the role of CFO, CEO and comptroller at the same time...raising serious questions on governance.
🌍 Crunchbase released some figures on the top startup ecosystems. Of course US and European locations rise to the top but some emerging markets are marking strides. Notably Beijing and Shanghai, but also Seoul (Korea), Bangalore (India) and São Paolo all of which are in the top 30.
🧧Jeff Richards a Partner at GGV Capital—one of the most active VC funds investing in the emerging world—reiterated his rationale for investing in the emerging world:
The world economy is a big economy. From our vantage point, you got to kind of … you got to focus, right? We have six general partners around the world, our total team is about 90 people. If you think of the economies of Asia, Southeast Asia, India, Latin America and the U.S. — which are our core focus areas — there are massive opportunities there. We’re going to see $10 billion companies, $100 billion companies built in those economies.
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