Are we finding or are we creating the next unicorn?

Ruben van Putten
7 min readApr 22, 2022

Scaleup Dilemma: cashflow vs. growth

Are we finding or are we creating the next unicorn (1 billion dollar startup)? A slight difference as it seems but there might be more to it.

Unicorn Business or Monkey Business

Our daily news is dominated by startups and scaleups growing exponentially fueled by funding rounds from venture capital and private equity investors. Once an obscure domain of starting companies with vague dreams and idealism driven hope, nowadays a mature asset class with high stakes for those involved. Although many startups fail to reach the next stage and are part of the more than 90% that never will become a scaleup, some of them grow exponentially faster when compared to a traditional company. These scaleups need to professionalize quickly and keep the pace with market demand and an aggressive competitor landscape.

Powered by disruption motives and the wish to be the top player in their field the only way is up. For such a demanding growth ratio funding is needed. Not the limited funding provided by family, friends and banks. Scaleups need investors willing to take on more risk with matching returns. These venture capital and private equity investors managing large funds can provide the needed resources but know how the game is played. That one or two successful scaleups need to make up for the unsuccessful startups in their portfolio. With the pressure coming from their LP’s to perform valuation must go up. The question arises if and how this leads to unsustainable overvaluations and eventually a possible financial collapse. The dynamic and complex startup and scaleup ecosystem provides numerous new opportunities. Innovative business models can disrupt markets but behind this new and exciting storefront their volatility might be the trigger to create another bubble.

From startup to scaleup and beyond

Let’s go back in ancient history; “Rocket Internet invests 16.5 million euro in Travelbird. This investment values Travelbird at 156 million euro.” (Emerce, 2015). Travelbird is an Amsterdam based startup selling daily deals in the leisure industry, mostly known for short city trips. The company started in 2010 and grew within 5 years to 650 employees (Travelbird, 2015). The acquiring of Travelbird by Rocket Internet seemed to give them a bright future, comfortably backed by investment companies. In 2018 Travelbird filed for bankruptcy due to not being able to restructure debt and a fragile business model relying heavily on marginal cashflows. Besides Travelbird there are numerous examples of startups and scaleups that are valued solely on growth assumptions and possible future earnings. Most recent is of course WeWork, backed by Softbank’s Vision Fund and valued at 45 billion USD. In a couple of months diminished to a company fighting for survival and a 75% reduced value destroying billions of dollars.

Fast growing scaleups like WeWork and others in better shape such as Bynder, N26 and Monzo, already classified as billion dollar companies, are on top of a list containing thousands of fast moving smaller companies searching for their next funding round. Currently funding for companies with high growth potential, or in this case startups and scaleups, is widely available as venture capital and private equity investment companies are searching for asset classes that can deliver the desired returns. Every day articles can be read on companies receiving funding to realize growth. Various reasons can be the source of these funding requirements, e.g. the need for working capital, launching new productlines or acquisitions. More traditional companies follow a path to maturity that takes years or even decades. During this ‘growing up’ process companies pass multiple classic organizational structures like the divisional structure and the machine bureaucracy (Mintzberg, 1981). Since the rise of Silicon Valley, but nowadays also in Berlin, Amsterdam and various other cities with an attractive startup environment more startups and scaleups are founded. These startups are radically different compared to more traditional (starting) companies, not only regarding to products or services which are mostly technology driven and have to be scalable and repeatable, but also when looking at the organizational structure. Often a team of several developers or marketeers, trying to disrupt the market with nothing more than a good idea and a low budget. These startups, also called New Technology Based Firms (NTBF’s) play a crucial role in the dynamics of the global economy. They are characterized by fast growth and should either become market leaders or create a new industry. A successful startup has to find momentum (market validation and traction) and scale up to survive (Bertoni, Colombo, & Grilli, 2009).

Move fast, be agile

The technological development and the possibility to start a competitive service at low cost requires fast movement by a startup. Due to the necessity of scalability the shortened business lifecycle in regard to the organizational structure demands relatively more resources. Apart from a solid network these scaleups have a larger than average need for funding. The high risk profile of this asset class combined with a limited cashflow and lack of assets make that more traditional providers of funding such as banks are not the obvious suppliers for funding. They are not willing to provide the needed credit in the case of high growth scaleups that are limited by their own ability of creating a sustainable cashflow (Cassar, 2002).
However, startups are not all successful and have a larger chance of failure than traditional companies. The main causes are their lack of resources and the inevitable inability to carry losses combined with an underdeveloped management organization. To overcome this liability of newness extra resources have to be raised which makes them dependent of external investors (Chang, 2002).

Show me the money

When informal funding or bankloans are not sufficient anymore startups can revert to several types of investors such as business angels, venture capital or private equity (Berger & Udell, 1998). Startups showing the potential to scale fast are often backed by venture capitalists or private equity firms when the need for funding grows exponentially (Bertoni, Colombo, & Grilli, 2009). For startups the most used source of funding is venture capital (Davila, Foster, & Gupta, 2003). Startups backed by venture capital have a better chance of survival. To improve their succesrate and possible returns venture capitalists select investment opportunities based on market conditions, product or service attractiveness and capabilities of the entrepreneur (Zacharakis & Dale Meyer, 1998).

Investors providing funding for these type of companies are willing to take that extra risk but demand a high return and take an actual stake in the target company to protect their investment. The initial, often idealism driven, startup has to professionalize because of the demands on structure, financial targets and process by the investor who is already planning a possible exit (Fried & Hisrich, 1994). The valuation of traditional companies can be calculated as the sum of the value of the separate parts, products and services. The growth of the company is the increase of output of these products (Penrose, 1959). But how does one calculate the actual value of a low- to non-asset company which worth is locked in hope, optimism and future exponential earnings?

Hope vs. fundamentals

Calculating a value for startups and scaleups is mostly depending on a multiple scenarios analysis. However, the probability of a scenario is highly subjective and can create a difference of double digit percentages. This can result in a large variance in value reliability in the case of billion dollar companies and smaller startups are even more volatile (Goedhart, Koller, & Wessels, 2015). Often these scaleups sustain heavy losses during the first business cycle due to the need of large investment hoping to gain a sustainable portion of the market. Their future growth and earnings, and with that the possible return on investment, rely mostly on aggressive market behavior. This is even more the case in the United States than in Europe. As previous research showed there is a difference between regions when it comes to doing business. Whereas companies in the United Stated, and more specific Silicon Valley, focus mainly on growth at all cost to keep ahead of the competition, startups in the Netherlands have a tendency to scale coming from a sustainable cashflow. ‘Make sure you are actually selling something and scale when possible’ (van Putten, 2016). A possible downside to this method is a lower growth ratio.

Raising new investment rounds and with that pushing value is imperative for the entrepreneur as well as the investor demanding a decent return on this high risk asset class. An angel investor invests its own money and has a different incentive than a venture capitalist or private equity firm who is mostly investing using an investment fund built from funding coming out of endowments, mutual- and pension funds. The continuous pressure on investors to keep performing and increase value might be subject to moral hazard. In 2018 venture capital investment reached an all-time high and more tech scaleups with high valuations are eager to launch their IPO at the top of the current cycle. Softbank’s 100 billion dollar Vision Fund focusing on tech investment received complaints from their two largest investors about overpaying for tech companies. (Durden, 2019). These limited partners, the Saudi Public Investment Fund and the Abu Dhabi Mubadala Investment Co., are not pleased with the current methods of Softbank that increases valuations when selling investments to their Vision Fund and thus driving prices and generating a disadvantage for their LP’s. An example is the scaleup Oyo Hotels that received an investment of 100 million USD by Softbank in 2015, was sold last year for twice that amount to their own Vision Fund and is valued a year later for 5 billion dollars (Dobber, 2019). High valuations for fast growing companies are backed by the possibility of future earnings. However, the market might not be large enough to fill those expectations.



Ruben van Putten

Founder Qapital | PhD Researcher Informational Sequencing & Risk Propensity in Venture Capital