April 9, 2020
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Silicon Valley Camels, will you please stand up

By Collin West,  Nihar Neelakanti, Alex Lazarow, Gopi Sundaramurthy:

In response to our last newsletter, Kate Clark from The Information recently asked, “What is a Silicon Valley Camel?”We figured we’d answer.[embed][/embed]The term Camel was originally coined by Kauffman Fellow Alex Lazarow as part of his new book Out-Innovate: How Global Entrepreneurs - from Delhi to Detroit - Are Rewriting the Rules of Silicon Valley. Here’s our take on it and why we believe Silicon Valley needs Camels, not Unicorns, to outlast COVID and a downturn at large.But first, in case you didn’t know what makes a camel so magical, here are 3 reasons why:

  • They aren't made up animals. They are real and survive the harshest environments in the world. 
  • They can go a long distance without much water. But when water is available, they can guzzle it faster than any other animal (100 litres in 10 minutes). 
  • They are adapted to live in deserts around the world, both hot and dry.  

Perhaps an apt metaphor for our current situation. In the wake of COVID-19 and a wave of failed IPOs, many startup leaders are questioning the grow-at-all-costs methodology that has pervaded the Silicon Valley mindset. In a world where consumer spending is slowing and the greater fool has disappeared - we have indeed found ourselves in a desert, without a genie lamp.

How did we get here? The Fat Cat Strategy. 

For decades, Silicon Valley’s model for growth has been defined by rapid customer acquisition to drive product innovation and market share. Ben Horowitz’s argument in The Case for the Fat Cat Startup makes it clear. Here is the core argument:

There are only two priorities for a start-up: Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

This strategy works. Many unicorns have been built on this model and have changed the world, see Uber, Robinhood, Airbnb and others. These companies have offered massive subsidies and discounts to acquire customers and “blitzscale”.But this is really a privilege if you think about it. This kind of rapid expansion would not be possible without venture capital’s support. Take for example the following chart from Kauffman Fellows Research Center. Venture rounds at Series A and B have grown 68% and 62% respectively since 2008, AND at the same time, the number of days it took to close the next round has been cut in half. This means startups, at series A and B, are burning at 3x more cash than a decade ago. That extra cash, is not being used to extend runway.

Startups, at series A and B, are burning 3x more cash than a decade ago. That extra cash, is not being used to extend runway.  
Silicon Valley Camels

As Alex notes in his book, “Venture capital can also be addictive. If companies get used to running on jet fuel, it becomes harder to switch to diesel.” As a result, the tech industry’s often celebrated fast winners are equally contrasted by losers (e.g. Juicero, Theranos, WeWork). Even among success, according to research by Correlation Ventures, funding unicorns has, with few exceptions, not translated into outsized venture returns: “In the subset of Unicorns that have exited over the past decade, investors realized less than a 10X return in a majority (62%) of the financings in those [unicorn] companies.”

The growth-at-all-costs strategy works well for winner-takes-all markets, in hyper-bullish markets with abundant venture capital. The question is: what about for the remaining 99% of the time?

Alexa, define “Camel Startup”. 

As Alex notes in his book, a camel startup fulfills the following conditions:1 - They focus on building a product or service that serves a critical need, and they charge for the value they create - they don’t subsidize in service of growth. Their model has sustainable unit economics from the get-go.2 - They manage costs. This means keeping the burn proportional to the business. Of course, camels grow in good times, but they can get back to a position of sustainability when they need to. Just look at the case of Grubhub which was sustainable at every venture raise. 3 - They take a long-term view. The case of Qualtrics is pertinent. Their big breakthrough happened after year 13, when they developed the enterprise model. Camels take the long-term view.Camels shift the nature of the Valley of Death by taking a more balanced growth. The graph below, explains this dynamic succinctly.[caption id="attachment_7813" align="aligncenter" width="640"]


Source: Out-Innovate: How Global Entrepreneurs - from Delhi to Detroit - Are Rewriting the Rules of Silicon Valley[/caption]Camels are built in some of the toughest ecosystems in the world. They are built for sustainability and resilience. In that way, they turn these challenges into advantages and thrive over the long-term.OK, camels may outlast the unicorn, but they definitely don’t come in first place, right? Wrong. Camels are being built outside Silicon Valley, be it in the MidWest or around the world, and they are thriving. Atlassian, Grubhub, and Qualtrics stand as great examples of startups that only raised what they needed, built a rock solid product, managed burn throughout the lifecycle of the company, and chose sustainability over rapid expansion. Of course you don’t need to be based at the Frontier for this. It works equally well in Silicon Valley. Zoom is the perfect example. The company was one of a handful of tech IPOs this past year that was actually already profitable. While Airbnb has raised over $4.5B in private financing, Zoom, which now has a market cap north of $30B, had only raised $146M in the private markets.As startups manage and ultimately thrive coming out of this crisis, it will be the camel not the unicorn that will succeed. For more reading on how to build a camel, here are some resources: