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For the past decade, the startup ecosystem has been dominated by the “Unicorn” phenomenon. With reality shows like Shark Tank, Horse’s Stable, and others bringing the conversation to the dinner table, the word “Unicorn” is unsurprisingly on everybody’s tongues.

So what is a Unicorn startup?

A Unicorn is “a startup company with a value of over $1 billion.” These companies are often characterized by their hyper and rapid growth. They often rely heavily on venture capital funding and prioritize user acquisition and growth. The idea is to quickly capture a significant market share, even if profitability is not a priority.

Some advantages of unicorn startups are that they can grow incredibly quickly and disrupt entire industries. Companies like Uber, Airbnb, and WeWork have all achieved unicorn status by providing innovative solutions to longstanding problems. Back home, we have Zomato, Upstox, and Zoho, who have grown tremendously, driven by their products and services.

Also, these businesses often have access to vast amounts of capital, allowing them to invest heavily in R&D and stay ahead of the competition.

However, as the market becomes more saturated with these companies, investors become more discerning about where they put their money. With the over-reliance on external funding sources to fuel growth and expecting to turn profitable eventually, the “Unicorn” model has started developing cracks.

Central banks globally raised interest rates to stem inflation that accelerated amid the Russia-Ukraine war in Europe, not to mention Covid before, throwing financial markets into turmoil. Evidently, these macroeconomic changes have taken a toll on the startup ecosystem.

Indian startups raised nearly $41 billion in equity rounds in 2021, meaning companies had a lot of cash on their books. But funding has slowed down consistently since the first quarter of this year amid the macroeconomic headwinds. In fact, according to a new Tracxn report, startups in India saw a 75% drop in funding in the first quarter of 2023 compared to the same period in 2022. With massive layoffs not making things any more convenient for the ecosystem, investors are reconsidering their investment theses.

Considering all this, there has been a growing interest in what some call “cockroach startups.” These companies, which focus on sustainability and resilience rather than rapid growth, may be signaling the end of the unicorn bubble.

Per their namesakes, these are businesses built to last. These startups focus on profitability and sustainability.

Cockroach startups often bootstrap their way to success, meaning they rely on their own revenues to fund their growth rather than raising outside capital. They prioritize building a loyal customer base and retaining them over time rather than focusing on rapid growth.

One of the main advantages of a cockroach startup is that it is more likely to weather economic downturns or market fluctuations, as it does not rely on outside investment to survive. Additionally, these businesses can often scale at a more manageable pace, avoiding the potential pitfalls of overexpansion.

Two of my favourite businesses, Zoho and Zerodha, fall into this category.

Zoho is a Chennai-based company that provides cloud-based business software. The company was founded in 1996 and has grown steadily over the years, focusing on profitability rather than rapid growth. Zoho has never taken on outside funding, and its founder, Sridhar Vembu, has spoken out against the unicorn trend, arguing that it is not sustainable over the long term.

Another example of a successful cockroach startup is Zerodha, a Bangalore-based discount brokerage firm. The company was founded in 2010 and has had a topsy-turvy journey, but it always focused on creating value and trust for the user rather than rapid growth. Zerodha has never raised external funding and has been profitable since its inception. It is a rare example of a bootstrapped startup that has succeeded without relying on massive amounts of funding. Their CEO, Nithin Kamath, said at an event, “Raising money is not an award; it’s an obligation.”

The shift towards cockroach startups is not just about building sustainable businesses but also about a changing mindset among entrepreneurs.

In the past, there was a sense that the only way to build a successful startup was to raise massive amounts of capital and achieve rapid growth. And hey, who can blame these founders? External funding implied validation, in a way. This, fueled by the founders’ grit and determination, meant the company was more likely to succeed.

However, as more and more companies have followed this model, it has become clear that it needs to be more sustainable over the long term.

These days, entrepreneurs are beginning to focus on building businesses that can last, even if they don’t become unicorns. It means being more strategic about funding, focusing on profitability over growth, and preparing for economic downturns and other challenges.

As Ashneer Grover ironically puts it, “Dhanda ya Dogalapan?”

Yet, the rise of cockroach startups may signal a shift in the startup ecosystem towards more sustainable and resilient business models.

However, unicorn startups may continue to thrive, albeit perhaps with more scrutiny and selectivity from investors. But, more entrepreneurs may possibly embrace the cockroach approach to building businesses that can last over the long term.

Zerodha and Zoho have shown that it is possible to build successful businesses without relying on massive funding or unicorn valuations.

So, Unicorns vs Cockroaches? Who wins? Which model is better for business?

Unfortunately, there is no one-size-fits-all answer to this question.

Both models have advantages and drawbacks, and the choice ultimately depends on the specific goals and priorities of the business. Founders and investors have to be highly judicious about picking a suitable model.

Go big or go home…right?

Author: Piyush Joshi (Source)