For quite a long time now, Silicon Valley has defied gravity — at times it has felt as though a creative idea and a whisper in the right ear were enough to create a windfall of investment dollars. Business models, customers, monetization — all felt secondary to the notion of a good story and the promise of success in some hazy, far-off future. As comforting as that may have been to the big thinkers and dreamers of the world, it was not reality. It was, in fact, a fairy tale.
Recently, there’s been a certain frothiness surrounding the stock market. Whether or not we’re experiencing a correction, a mood swing, or simply coming back to Earth after six years of growth, is all up for debate. Interestingly enough, though, the entire scenario has called into question the valuation of many companies in the tech space. A “unicorn bubble,” so to speak. Roughly translated: Are there really a myriad of relatively new companies that can possibly be worth a billion dollars or more? What is the criteria, and if they received a new valuation today, would they still hit that esteemed metric?
Let’s be clear: Facing potential rate raises and an investment market that’s more inclined to raise an eyebrow than a funding round, it may be time for many organizations to manage their expectations going forward. That’s not said out of malice; it’s much better in the long run to face reality instead of a down round, and part of that equation is avoiding overvaluation in the first place.
So what’s to be done? There are certainly a lot of unicorns running around right now — how are we to tell the good from the bad? Who has the staying power, the roots to go the distance and maintain their value? Let’s stay a little whimsical. Fairy tales only have three measurements of sturdiness, after all: Are they made of straw, sticks or brick?
A “straw” company faces the same issues a straw house might — you’re going to see this structure wobbling in the wind. Without the framework that is a revenue model, there’s simply nothing to be built upon. At the end of the day, if there’s no clear path to success, to monetization, that doesn’t mean a company is in trouble, but it’s also unlikely that it’s worth a billion dollars or more. It’s likely still in a developmental phase, and may not have the right leadership team or employee culture in place. More likely than not, this type of organization is sitting upon fascinating, revolutionary technology, or has captured a new market somehow. That’s critical to driving our industry forward, but without a plan, it’s the most vulnerable of our current crop of unicorns.
A “stick” unicorn is no small accomplishment; for our purposes, let’s consider it something of an amalgam between the previous example of straw and the rock-solid brick unicorns. There are numerous factors that can take an organization to the next level here. A revenue model is a must-have at this point. More importantly, a fantastic set of customers, likely already opted in either philosophically (for consumer-facing businesses) or contractually (in the B2B world), will be the greatest advocates of this business and will further facilitate its growth. Predictable income, which can be measured with as much detail as a science in the world of SaaS, can tell a clear story here, creating a compelling, investment-worthy storyline using metrics and data, not simply ideas.
A “brick” unicorn doesn’t need to rely on conceptual thinking (like straw), or a set of projection data (like stick) to earn its status. Brick unicorns have history to rely on. They’ve already proven themselves. There is no big, bad wolf in the world that is going to blow them down. What does that translate into in reality? Profitability is a key contributor. Years of maximizing profits successfully, while still displaying extremely rapid growth. Often this can be traced back to market opportunity — is this organization adaptable enough to create and service an enormous market? If they’re solving problems for wide-reaching verticals such as life sciences or financial services, the answer is likely yes.
Experienced leadership teams are critical, as well. Partner and — in the world of software — platform support can be huge boons here, saving monumental amounts of expense and keeping the focus on growing the business. In the case of my company, Apttus, building our applications on the Salesforce platform since we got our start in 2006 created an opportunity that is still unfolding today, in the form of a $108 million dollar funding round and a valuation that placed us in the esteemed group of unicorns we’ve listed here.
So what’s next for this little fairy tale? Are we really going to see unicorns lose their status, be put out to pasture? Likely not — Silicon Valley will always foster innovation, and innovation always has value. There’s no mistaking the recent trembling of the stock market as a warning sign, however. Organizations must take the time now to put their house in order, no matter what it’s built from. Unicorn status isn’t meant for every business, but if you’ve built something that’s gained anywhere near this kind of value, it would simply be a shame to waste it; use every bit of creative thinking and safeguarding at your disposal, and earn your “happily ever after” with pride.
Kirk Krappe is chairman and CEO of Apttus. A veteran of enterprise software, he was involved in the very first instances of the Internet and enterprise applications. Prior to Apttus, he served as CEO of Nextance, and held senior executive roles at I-many, Oracle and Siebel. Reach him @Apttus.
This article originally appeared on Recode.net.