Today is the fourth class in our current February class set. We will begin class with a casual conversation. Our listening material is about startups. I have included a transcript. We will finish class with some sentence diagramming.
SYLVIE DOUGLIS, BYLINE: NPR.
(SOUNDBITE OF DROP ELECTRIC’S "WAKING UP TO THE FIRE")
WAILIN WONG, HOST:
Adrian. Hey, Adrian. Over here.
ADRIAN MA, HOST:
Oh. Hey, Wailin. I hope I'm not late. Did I miss it?
WONG: No, you are right on time. But we got to hurry. Come on.
MA: OK. So what is this place called again?
WONG: This is Startup Stables, a place where young horses receive the very best care and hopes that if they get showered with love and attention and the fanciest food and grooming, something magical will happen. And that magical thing is happening today. That's why I texted you to come over in such a hurry.
MA: Oh, all right. All right. I'm excited.
WONG: Excuse me. Excuse me. Coming through. Come on, Adrian.
MA: Excuse me. Excuse me. Coming through.
WONG: Oh, Adrian, look.
(SOUNDBITE OF HORSE NEIGHING)
MA: Oh, my God. Wailin, that horse over there, it's transforming into a unicorn. There's, like, a horn and wings that are flapping and - oh, my God. I've heard of this happening, but I've never actually seen a horse become a unicorn with my own eyes. It's kind of beautiful, actually.
(SOUNDBITE OF HORSE NEIGHING)
MA: But, Wailin, what's going on over there with that horse in the corner? It looks kind of lonely.
WONG: Oh, yeah, that horse. You know, when it first got here, it got so much attention. But then it never turned into a unicorn, so people just lost interest.
MA: Oh, my gosh. That's a huge bummer. I mean, it looks like a perfectly nice, healthy horse - I mean, even if it's not a unicorn.
WONG: Well, it's not all sugar cubes and spa treatments at Startup Stables or in the real-world tech industry.
This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.
MA: And I'm Adrian Ma. When it comes to venture capital and tech, there's long been a pressure on startups to become unicorns - to get really big, really fast. But very few companies actually ever achieve this, even in the good times.
WONG: Now as those good times are winding down, tech investors are getting more selective about where they put their money, and this leaves a lot of non-unicorns in a kind of startup limbo. Today on the show, we look at how that happens and what one investment firm is doing to find a home for these stranded horses.
(SOUNDBITE OF MUSIC)
WONG: In the tech world, a unicorn is a private company founded in 2003 or later that's valued at a billion dollars or more. A venture capitalist named Aileen Lee is credited with coining the term almost a decade ago.
MA: And these billion-dollar companies are still pretty rare. According to one estimate, there's just over a thousand unicorns in the world today. That is a thousand out of tens of thousands of startups just in the U.S. all trying to build the next great product or service and do it really fast.
LAUREN BONNER: Unicorns are companies that are growing at kind of astronomical, magical rates.
WONG: Lauren Bonner is an investor with years of venture capital experience.
BONNER: They're doubling, they're tripling, they're 10x'ing (ph) year over year. And oftentimes, they're spending at a comparable rate to ensure that those growth rates continue to stay at those levels.
WONG: These companies are spending money on new hires and office space and marketing. And the money comes from venture capitalists. These investors write checks to a lot of startups, hoping that one company will achieve unicorn status and have what's called an exit. This could mean going public or getting acquired. And when that happens, the venture capitalists make such a big return on their unicorn investment that it makes up for the other startups in their portfolio that stagnate or fail.
MA: These unicorn dreams mean that venture-backed startups and their investors tend to prioritize explosive growth over everything else, including making a profit. And the traditional thinking is that the profits will come later, you know, after the company gets to a size where they just dominate the market. And besides, they can still make big bucks when they go public or get sold.
WONG: So as these companies expand, they raise more funding. Each round typically brings a bigger check and a higher valuation, all in the hopes of hitting that billion-dollar mark.
MA: Kathryn Minshew is CEO of The Muse. It's a jobs and career website that caters to millennials and Gen Zers, and she co-founded this business in 2011 and raised almost $30 million in venture capital in five years.
KATHRYN MINSHEW: We were on the classic venture path, which is, like, growth, you know, as high as possible, somewhat regardless of cost.
WONG: In one year, revenues at The Muse grew fivefold, and the number of employees tripled. The company added cities and launched a new service where customers could sign up for career coaching sessions.
MA: But all of this activity also made Kathryn concerned about the relative inexperience of her team. They were all first-time leaders, so managing this kind of expansion was pretty daunting for people who had never done it before. Kathryn started to think, maybe we should slow down a bit.
MINSHEW: I remember - I think it was a very key board meeting for us - looking ahead at that next year. And I said, look; we grew far faster than we expected to, but we still have a very young team. I think we need to target something that's more like 100% growth because there's challenges and problems, and we just need to make sure we're growing in a measurable faction so we can fix them.
MA: That was Kathryn's pitch to her board of directors, the folks who invested in her company. Let's aim for 2x growth, not 5x growth.
MINSHEW: And unfortunately, I had a board member who said, are you kidding me? I thought you had ambition. I thought I invested in someone who wanted to grow. You should be growing 5x again.
WONG: Kathryn and her investors had different visions for The Muse, so she stepped off that traditional venture path. But this meant no more big checks from her investors.
MA: And Lauren Bonner, the investor from the beginning of this episode, she says she's seen this scenario play out a lot of times in tech. The majority of startups who go through two big rounds of venture funding, they don't make it to a third round. They end up in this limbo. And this could happen even more now that venture investing is pulling back.
MINSHEW: I saw so many companies that get stranded, you know, companies that because they're not growing quite as fast as others in a venture portfolio, they sort of get forgotten.
WONG: And that means there are lots of non-unicorns just milling around the tech sector. Lauren calls these businesses workhorses or thoroughbreds. And last year, she and a business partner launched an investment firm to put money in these kinds of tech companies. They invested $8 million in Kathryn's business, The Muse, after a venture capital investor introduced the company to Lauren.
BONNER: People say, oh, well, you know, if they didn't become a unicorn, are they any good? Like, of course, they're good. These are companies that have really quality products, are generating $10+ million of revenue every year.
WONG: Lauren's investment firm, MBM Capital, is only a year old, so it's too early to see whether their bets on tech workhorses will pay off. But their plan is to help companies become profitable, and then grow them so that, in three to five years, they're worth at least five times more, and then they'll be in good shape for getting acquired.
MA: For a venture capital investor, a startup growing at that pace just isn't fast or strong enough. But Lauren is using different criteria.
BONNER: We have different expectations. We're trying to get 5- to 10x. We're not trying to get 100x.
WONG: Like, don't turn your nose up at a perfectly fine pony.
BONNER: That's right.
MA: Kathryn Minshew of The Muse, she says she hopes her experience opens the door for startup founders and investors to talk about outcomes that are not just unicorn or bust.
MINSHEW: We've built the ecosystem up to say, this is what success looks like, and if you choose something else, you're not that. You know, building a great company for some industries or some problems is much better suited by a sort of slow, steady, consistent approach. And I think that we would all be better served by having a more nuanced conversation.
(SOUNDBITE OF HORSE TROTTING)
WONG: Well, Adrian, I hope you enjoyed your visit to Startup Stables today.
MA: I did. Do I get to take home a pony?
WONG: Yeah, you do. How do you think we're getting home?
(SOUNDBITE OF MUSIC)
WONG: This episode was produced by Brittany Cronin and engineered by Katherine Silva. Sierra Juarez and Dylan Sloan checked the facts. Viet Le's our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.