NOTE: How did Brian Chesky of Airbnb finance his take-off and grow with control? VCs finance after Aha, when there is proof of potential, and call it a startup. Chesky used smart financing to grow from idea (real startup) to Aha (VC “startup”) and to keep control of the venture and of the wealth created. For more, see “Finance Secrets of Billion-Dollar Entrepreneurs”

Bootstrapping: Chesky and his partner started Airbnb by renting air beds in their apartment to make money. They also saved money by using their 3-bedroom apartment for their office until they had 15 employees.

Financing to the stage. At the start, Chesky and his co-founders were rejected by many investors and VCs. The initial financing was provided by about $30,000 in credit card debt. Their initial focus was to rent rooms in cities when there were major conventions. They also sold cereal boxes named after the presidential candidates in the 2008 election, which offered them profits and publicity.

Channeling equity. The co-founders developed the app internally and launched their site with about $20,000 from family and friends).

Using Alt-VC first. After the launch, they sought $150,000 for 10% of the company from 15 angels. Few showed interest. None invested.

Proving bottom-up assumptions. Then they worked with an incubator and got $20,000 in seed capital and advice to focus on one market to prove viability. Heeding this advice, Airbnb focused on New York City, because it gets global visitors. Many of the New York guests became hosts when they returned home. With this start, Airbnb grew to 10,000 users and 2,500 listings. After this proof of strategy and leadership, Airbnb got VC.

Focusing on cash flow till Aha – unless you are in Silicon Valley. Airbnb did not show a profit till 2016, when they were about 8 years old. Being in Silicon Valley, they had no trouble finding growth capital from VCs after they proved their unicorn strategy and leadership.

Conclusion: Use smart financing to keep control and use the capital wisely to prove your unicorn.

Reed Hastings started Netflix, with Marc Randolph, in 1997 and took the company public in 2002. Netflix was initially financed by Hastings and later by VCs. Paul Holland of Foundation VC notes that Netflix made more money for them than the firm’s 199 other investments combined.

NOTE: One unicorn pays for a lot of VC mistakes. Getting VC is not winning. Remember the 199 non-unicorns in Foundation’s portfolio (for more on VC odds, see The Truth About VC).

3 Tactics to Find the Unicorn Opportunity

1. Start with the unmet need. Netflix started by renting movie DVDs by mail using a mail subscription model, compared with Blockbuster’s model of renting DVDs in stores, and charging late fees. Hastings was convinced that the biggest unmet need for the consumer was to avoid late fees. Hastings is said to have hit upon the idea for Netflix after he had to pay a late fee. But entrepreneurs often embellish how they got the original idea. According to co-founder Marc Randolph, the above story is not true. Blockbuster could have imitated this model, but perhaps it was too addicted to the late fees for its profits and failed to adapt. And it had a higher fixed cost of operations due to its retail stores and did not want to lose the extra margins.
2. Imitate and improve for more bang per buck. Hastings realized that his gym allowed him to work out as much (or little) as he wanted for one monthly fee. He imitated the gym’s fee model for Netflix – with no due dates and no late fees.
3. Jump on an emerging, high-potential trend for take-off. By avoiding late fees, Netflix got a foothold with the emerging trends of DVDs, which were easier to mail than cassettes, and the Internet, which allowed the company to offer its DVDs without the need for a catalog. But Netflix really took off when streaming started on the Internet about 8 years after Netflix was started and movies could be downloaded.

Lesson: Find your unicorn opportunity on an emerging trend where the incumbent giants cannot easily imitate and squash you.  Then find the right strategy to take advantage of the edge offered by the opportunity and the trend.

Photo by Compare Fibre on Unsplash

Innovation has become like apple pie, motherhood, and the flag. You dare not criticize it. Everyone praises innovation — from presidents to university professors. Innovation is a multi-billion-dollar industry. Conferences, books, academic scholars, and all kinds of experts tell us that we need to innovate to succeed as entrepreneurs, corporations, and as a nation. The belief that entrepreneurs need to be “first-movers” has become part of entrepreneurial folk lore. Corporations hire numerous high-priced consultants to teach them innovation.

But is innovation really needed to succeed?  Do you need to be a first mover?

The reality is that only about 11 percent of “first movers” succeed in dominating their industry (Pioneer Advantage: Marketing Logic or Marketing Legend by Peter N. Golder and Gerard N. Tellis, Journal of Marketing Research, 5/93, page 153; www-bcf.usc.edu/~tellis/pioneering.pdf‎). 89 percent do not. In fact, the Stanford Business School authors who originated the term “first-mover”, and gave VCs and entrepreneurs permission to waste billions during the dot-com boom to be first movers recanted their findings.

Unicorn entrepreneurs did not have to read papers to know that the “experts” were wrong. Examine what these successful entrepreneurs did, and you will see that they did not emphasize innovation. They were fast improvers to win. Not everyone copies and succeeds, but if 89% do, maybe you should consider this strategy seriously.

Steve Jobs, one of our greatest entrepreneurs, was one of the foremost practitioners and proponents of the fast improvement strategy among our billion-dollar entrepreneurs. He was famous for having said that “we have always been shameless about stealing great ideas” (http://thenextweb.com/apple/2010/03/05/steve-jobs-shameless-stealing-great-ideas/). T. S. Eliot summarized this well when he noted that “Immature poets imitate; mature poets steal; bad poets deface what they take, and good poets make it into something better, or at least something different” (http://quoteinvestigator.com/2013/03/06/artists-steal/). Jobs was a “mature poet” and he stole quite a few ideas and technologies, and improved them with his rare genius, including:

• iPod: Others had developed mp3 players and many consumers had been illegally downloading music from Napster. Jobs’s innovation was to convince the music industry to work with him and make it legal for people to download music for 99 cents per tune.
• iPhone: Obviously, Jobs was not the first one out with a wireless phone. Nevertheless, he made it highly attractive and became the leader.
• iPad: Jobs was not the first with a tablet computer. But as with the iPhone, he made it The tablet to own if you were cool, and willing to pay more to show your cool-dom.

In fact, there is hardly anything Jobs did invent. He was a fast improver. And he was not an exception among elite billion-dollar entrepreneurs.

Gates did not innovate to develop his first operating system (MS-DOS). He bought it. He also copied Xerox and Apple with a graphic-user-interface based operating system called Windows, and he appropriated ideas from a host of others in the Office Suite of products to dominate the IT industry. He was a master of fast improvement.

Google was not the first to Internet search. Page and Brin improved Internet search results and dominated it. Zuckerberg, another fast improver, copied MySpace to build Facebook. Dick Schulze improved Circuit City to build the Best Buy chain (Bootstrap to Billions/ www.dileeprao.com) .

Many of the unicorn entrepreneurs did not innovate. They quickly imitated and improved. They did not have time or money to waste on innovation.

MY TAKE: Innovation can be expensive and usually quixotic for entrepreneurs without cash. Jobs was a great entrepreneur. He quickly imitated and improved. He did not innovate. His gift was to make innovations better, package them to make them cool, and sell them with a flair that was unmatched by the managers who roam our corporate corridors. In our faddish focus on innovation, we seem to have given imitators a bad name. Ironically, Xerox was one of the few corporations that truly did innovate – in copiers. If you want to imitate unicorn entrepreneurs, look for an emerging high-potential product and improve it (without violating patent laws, of course) – when the trend is at the emerging stage.