Jared Yellin, Founder of Project 10K, Launching 10,000 Tech Companies.
I find that it’s the nature of an entrepreneur to go for a grand slam, but is it still the same game with tech startups? In the tech space, “grand slam” is synonymous with unicorns.
The term “unicorn” describes a startup with a valuation of over $1 billion. But this label has become increasingly difficult to achieve in the crowded startup scene. Yet, venture capitalists and angel investors are still focused on extremely oversized returns and neglect the “next big thing,” which are singles and doubles.
Singles and doubles are companies that reach more realistic valuations of $1 million to $10 million. They are considered “too small” for many venture capitalists, who are looking for companies that are playing the game of financial arbitrage with bloated valuations that are not derived from real financial data. These smaller yet still successful startups are often referred to as “singles” and “doubles” and are quickly becoming the new unicorns.
A Changing Landscape
Data from PitchBook indicates that unicorns are not quite facing extinction, yet valuations are on the decline. In Q4 of 2022, unicorns raised the least amount of capital since 2019. Dealroom reports a 90% drop in unicorn creation rate in 2022, with North America experiencing the most significant decline at 64%.
With this statistic, while singles and doubles are often overlooked, I believe they can be the most impactful players in the tech startup ecosystem.
Why Singles And Doubles Are Proving To Be The New Unicorns
Greater Access To Capital: Based on my experience, I notice that businesses that reach the $1 billion-plus mark often struggle to access capital, as investors are more likely to invest in businesses with lower valuations in order to get a larger percentage of ownership. This makes singles and doubles ideal for entrepreneurs and investors alike, as they are more accessible to capital.
Lower Risk: Single and double startups offer lower risk when compared to unicorns because they are significantly less capital intensive and have a much shorter time horizon. While unicorns may have the potential for huge profits, the chance of failure on the journey to a unicorn is high, and the need for endless capital infusion is common.
Faster Growth: Singles and doubles are easier to scale because they are more agile and, like my previous point, require less capital and resources to expand. This means that investors can see a return on their investment quicker, allowing them to move on to other investments faster.
More Stable: Unicorns can be volatile, as their success or failure often depends on the whims of the market. But singles and doubles are more stable, as their success is based on the consistent performance of their product or service.
Greater Impact: Singles and doubles have the potential to disrupt an industry with their innovative ideas and products. By providing services that are tailored to specific markets, singles and doubles can have a more direct and meaningful impact on the lives of their customers. With specialized services or products, they can carve out a place for themselves in the market and increase their chances of success.
Oversized Return Potential: Although singles and doubles may not reach the lofty billion-dollar valuations of tech unicorns, with the minimal need for capital and the speed to exit, investors are still able to achieve oversized financial returns, which more than justify the amount of time the capital is allocated.
Getting Involved
Not all startups are the same, and there are a number of risks associated with investing in them. To make the most of your investment in startups, it’s important to properly assess the company and the field in which they operate.
1. Research the company and the market. Before investing in a startup, read up on the company, its products or services, and its competitive landscape. Look for early signs of success, like increasing sales or expanding customer base.
2. Look at the funding situation. Finding out the amount of money raised and who funded it is a great barometer to consider because it will help you piggyback on the due diligence that has already been conducted.
3. Would you use it? If you plan on using a solution once it launches or you are already an active customer of a platform, having some level of ownership when the opportunity presents itself is a good investment baseline.
4. Can you connect 4 times your investment? I always tell potential shareholders if they can connect a startup with 4 times the amount of revenue compared to the capital they will invest, then they should consider investing. This means if you are considering investing $100,000 into a startup, you should go through your network to see if you can find $400,000 worth of connections.
5. Have an exit strategy. Even if the odds of success are on your side, you should have an exit strategy in place. Determine when you’ll start enjoying returns on your investment and when you’ll walk away if the business isn’t performing as expected.
Investing in single and double companies can be a lucrative venture with great potential for returns. But, there are a few challenges to consider before taking the plunge. The main challenge is the amount of time and effort needed to manage and operate these types of business entities. These businesses require more management and oversight than larger entities.
There is also a risk of overexposure to certain markets or economic conditions. This could result in unequal returns and could lead to significant financial losses if not managed properly. The challenge for investors then lies in understanding the long-term prospects of investing and how to mitigate or minimize any potential risks.
Pulling It All Together
Singles and doubles can be a great opportunity for investors looking to get in on the ground floor of a burgeoning tech business. They offer opportunities for investors to make money with significantly less risk, and they provide a platform for entrepreneurs to realize their dreams.
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