Thursday, March 31, 2016

Predicting Unicorns

Last week I lectured three very different groups: some top executives of a large American manufacturing firm, a roomful of Russians, and several thousand Chinese entrepreneurs in Shanghai. Very different groups. Very different topics. But one question was asked in every venue: "What business is the next 'unicorn'?"

If you can read then by now you are tired of hearing about unicorns. The internet tells me that the trope refers to startups valued at $1 billion. Most pundits talk about them only after they are valuable, but anybody can look in the rear view mirror. What my audiences worldwide want to know is how to see them coming.

First let's get something straight: Statistics tells us that amazing exceptions will happen, every now and then, at random. In fact, amazing exceptions will even come in bunches every now and then at random, in the same way that my music player will randomly serve up three straight "Steely Dan" songs in a row. Call them what you want; black swans, unicorns, whatever. Unusual exceptions happen at random.

But with unicorn businesses there is a pattern we can see in advance. This pattern won't tell you who is the next unicorn. It will tell you where not to look, however.

Let me explain. Research shows that waves of exuberance about businesses tend to be biased. Since we're all looking to each other to find the next new thing, once a market space starts trending it's bound to get hyped beyond its real potential; that's what the "hype cycle" is all about.  All that buzz makes it much easier to start companies in a hyped space. Ironically, this makes it so that many of the least competitive firms are the ones that herd into the hot markets where everyone wants to invest.

Want to find the next unicorn? Listen to where the buzz is coming from and run the other way. I can't tell you who will be the next unicorn, but I can tell you it will come from where we least expect it.


This idea is systematically researched in my paper with Professor Elizabeth Pontikes.