John is a member of RBCx’s banking team, where he predominantly supports early-stage clients across capital fundraising and strategic growth. In addition to this role, John works alongside RBCx’s capital team on both direct, indirect (fund-of-funds), and strategic investment opportunities.

Ideas Worth Noting

For readers with only a few minutes to spare, here are this piece’s key takeaways

  1. Unicorns are beginning to look like puppies. As 2013 had a total of 39 unicorns, 2021 alone bred over 500. The term once used to categorise companies that were as rare as a mythical creature, has evolved into one as common as a household pet. Those bred in 2021 are known for being both the hungriest (with the largest burn) and youngest (with the greatest proportion following an early-stage round) pack of all-time.
  2. Taking ‘at all costs’ too literally. As our tech ecosystem adopted the ‘growth at all costs’ playbook from the unicorn pioneers that came before them, a favourable macro environment enabled companies to get enamoured with burning and raising more and more capital – all with increasing valuations. This established numerous public cases of unethical business practices from companies cutting corners to literally grow ‘at all costs’.
  3. BNPL = buy now, prove later. A sector that accumulated over $8B of venture funding in 2021 and allowed over 100 global players to co-exist, thrived during the black-swan bull. Mass ecommerce growth, near-zero rates, low inflation, and categorical expansion fueled the model. Unfortunately, while the sector may have thrived in a strong macroeconomic environment, the unproven BNPL model is now at risk of mass consolidation.
  4. On-demand is out. Though the pandemic forced a new medium for grocery delivery, on-demand as a category has not yet proven to be a profitable model. Without having access to troves of marketing dollars to be used in the form of consumer bribery, investors have since realized that ordering a single avocado to be delivered in under 15-minutes may not be as lucrative as they once thought.
  5. Going all-in on the cloud. The black-swan bull accelerated the world’s transition in becoming digitally dominant, which is entirely led by cloud technology across both software and infrastructure. While the past decade revolved around cloud software adoption, the next decade will focus on cloud security and data infrastructure. With surprisingly low IT penetration, natural economic resilience, and a proven lever to combat inflation – the future of cloud technology could not be any brighter.

Introduction

In 2013, Aileen Lee posted an article in TechCrunch titled, “Welcome to the Unicorn Club: Learning From Billion-Dollar Startups”.[1] Since then, our technology ecosystem has both embraced and rallied around a mission of building companies with a private valuation over one billion dollars. The rarity of this species was designed to emulate one of a unicorn, seeing as in 2013, only 39 existed (which was equivalent to 0.07% of all venture-backed companies funded from 2003 – 2013)[1]. With the global recognition that these now public, once-unicorns have established since – from the likes of Uber, Snapchat, Slack, Shopify, and Airbnb – every single entrepreneur, employee, or investor has made it their mission to do the same. The goal of becoming ‘the next Uber’ or ‘the Shopify for [insert here]’ inevitably took over.

This then begs the question – what was the so-called ‘unicorn playbook’ and how could companies replicate its mentality and execution? It came down to a few key points:

  1. Prioritize building in a huge, high projected-growth total addressable market (i.e. TAM) that will never saturate
  2. Capture the market by leveraging speed, while remaining solely focused on top-line growth (i.e. acquisitions, transactions, gross-merchandise value)
  3. Utilize widely available capital to compete and scale faster by investing in every aspect of the business

More precisely, the fundamental playbook that our tech ecosystem adopted over the past decade, which was further highlighted by the outward-facing nature of being recognized as a unicorn, was one of ‘growth at all costs’. With high-flying unicorns focused on capturing the market and utilizing capital as a weapon, the market began to value growth as the primary driver of valuation, which naturally trickled down the entire spectrum as private companies adopted their own ‘blitzscaling’ playbook. Though founders were the ones that made the decision to emulate aspects of this playbook in their respective companies, the structural incentives across employees, investors, and limited partners (LPs) were all equally on board for it. With a hyper-focus on growth naturally leading to an increased private valuation:

  • Employee compensation packages (inclusive of stock options and registered stock units or RSUs) would be worth more
  • Founder equity positions and net worth would be worth more
  • GP portfolio values and total value to paid-in-capital (TVPI) would be marked up higher
  • LP return expectations and portfolio values would be marked up higher

As private tech companies leveraged the growth playbook and raised more capital on higher valuations in later rounds, the plausibility of becoming a unicorn became in reach for many. This led to the unicorn path becoming widely understood across private tech:

Raise capital and spend it through a lens of ‘growth at all costs’. Twelve months later, hit the market again, be greeted with a higher valuation and more capital, and spend it just as ferociously. Soon enough, if you follow this playbook, your unicorn destiny will be fulfilled.

Unfortunately, this growth-first mandate and market-wide acceptance by founders and investors alike has led to numerous cases of companies cutting corners and establishing unethical business building practices.

  • In 2015, Parker Conrad’s company Zenefits was caught manipulating the state’s insurance licensing system and breaking regulatory compliance, after having raised $580M at a $4.5B valuation.[2]
  • In 2018, Elizabeth Holmes was caught deceiving investors of the accuracy of Theranos’ blood tests, after having raised $700M at a $10B valuation[3] (and was recently sentenced to 11 years in prison).
  • In 2019, Adam Neumann brought forward suspicions of poor corporate governance and questionable management actions following a public filing for his company WeWork, after having raised $10B from Softbank alone, at a $47B valuation.[4]
  • Even this past quarter, Twitter’s senior leadership team was accused of misleading their own board of directors by not providing a full accounting of the company’s security vulnerabilities and ‘presenting cherry-picked and misrepresented data to create a false perception of progress’ (i.e. growth).[5]

While it is easier to place the blame entirely on the companies themselves, equally culpable was the reality of the macroeconomic forces in our previous market cycle, which contributed to the widespread adoption of our growth at all costs playbook. A decade-long bull run comprised of low interest rates, controlled inflation, strong consumer confidence, high employment, greater private allocations from institutional LPs, heightened investment aggression from VCs, and an overall market acknowledgment of a technology-first future – underpinned our entire ecosystem. Over the course of our black-swan bull, the perfect macroeconomic storm enabled our ecosystem to take this playbook to a level we never even knew existed.

Not only did 2021 break records as the most fertile unicorn year our ecosystem has ever witnessed, but equally, with record fundraising and venture capital deployed, this unicorn pack has proven to be the hungriest pack of all time. With more capital raised and at their disposal, and with incentives across all stakeholders aligned for companies to spend it aggressively on capturing the market through top-line metrics, record burn rates were normalized. And what is even more remarkable about the 2021 pack is when you compare the number of early-stage unicorns born (following a seed, A, or B round) at 109[6], to the total number of unicorns born just two years prior in 2019, at 106.

Though unicorns themselves are industry agnostic, following 2021, over half now operate in fintech, retail tech/commerce, or cloud technology.[7] In the US alone, these themes accumulated over $173B of venture capital investment over the past two years, with $120B in 2021[8]. To understand further how operators in these three themes leveraged their own growth-first playbooks and how they are now positioned to build beyond 2022, let’s break it down.

Fintech

In the US, venture capital investments for fintech amounted to $35B in 2021, an increase of 94% from 2020. As payments experienced the largest YoY growth (doubling to +$8B), the sub sector within the $8 trillion payments industry that gained widespread consumer and investor attention over the past two years was that of Buy Now Pay Later (“BNPL”).

A modern version of factoring accounts receivable, the BNPL model equipped retailers with a new mousetrap by offering consumers the ability to pay for products and services through interest-free loan arrangements. BNPL providers would structure deals with merchants whereby they would receive a 4% discount on the retail price (or re-framed as charging a 4% merchant fee), and once a consumer purchase is made, would take on the full repayment risk equal to the remaining 96%.

The above outlines the first way BNPL providers utilize the growth at all costs playbook. By tapping into consumer psychology, and marketing themselves as a seamless path to instant gratification (from enabling consumers to make purchases they otherwise couldn’t afford), BNPL diverts attention away from the core offering of their business: providing microloans. Using Affirm as a proxy (a publicly traded category l