Tech Unicorns That Lost Their Horns: Learning from Billion-Dollar Downfalls

The private startup is said to have achieved unicorn status after reaching a valuation of 1 billion USD without going public. These companies are captivating the business world with their rapid rise and unique innovations. Such firms often gain immense investor enthusiasm, securing large funding for expansion. However, not all unicorns maintain their status forever.

Even after reaching high valuations, some of them face dramatic downfalls due to several factors. These factors include mismanagement, flawed business models, or changing market trends. Every business dreams of success, but nearly 90 percent of startups fail due to market conditions and similar challenges. While you can’t always escape failure, learning from the downfall of past unicorns can help you avoid the same mistakes. This article explains the stories of once-thriving unicorns that lost their status and the common pitfall you must avoid to prevent a billion-dollar downfall. 

The rise and fall of tech unicorns:

Unicorns emerge through unique ideas, aggressive marketing, and strategic investments. Venture capitalists invest billions of their money into promising startups during economic prosperity, leading to increased companies achieving unicorn status. The funding fuels rapid growth, and the startup’s valuation surges with the development of innovative technologies. Many of these startups adopt “blitzscaling,” a method to quickly become unicorns by preferring rapid growth over sustainability.

Scaling rapidly can help a business to have market dominance. This also leads to significant challenges in maintaining their high valuation; sometimes, startups even downsize to cut their losses. Once highly-valued startups with a valuation of over $1 billion fail to maintain their status due to rapid decline in value, market fluctuations, changed customer preference, and poor financial management. 

Factors contributing to the downfall: 

Overvalued valuations and investors hype: Many unicorns attract investors based on hyper rather than business services. Investors also hype these companies for their potential rather than profitability, leading to unrealistic expectations. The startups are often valued at inflated prices in the heated market, making them vulnerable to market corrections.

Flawed business model:  Using a model where tools and processes that are appropriate for smaller companies are scaled up to larger ones with little to no modification. This approach is deeply flawed yet surprisingly adopted by many businesses. Some startups tend to focus on increasing scale without being able to establish a credible revenue model. To make matters worse, if the investors realize there’s too much risk being taken, they might divest, leading to further volatility.

Market misjudgment: Unicorns like Quibi failed to maintain their status because they misjudged consumer behavior and market demand. Not analyzing the market and target audience can lead to the creation of solutions for problems that don’t exist. This contributes to the loss of money as well as resources. 

Competition and changing trends: The emerging competition can disrupt the company’s business model and overshadow unicorns that fail to adapt. If the unicorn fails to keep up with rapid shifts in technologies and innovations, it may lose its market relevance.

Leadership and Governance Issues: Internal conflicts like leadership disputes and lack of strong corporate governance can break investor confidence while damaging the company’s image. Poor leadership and lack of accountability led to the failure of several unicorns. 

Case studies of Fallen unicorns:

WeWork:

WeWork is a provider of global workspaces like private offices and meeting rooms. The firm aimed to help people and businesses work together in a flexible work environment. The startup became unicorn in 2013. The company had the highest valuation of $47 billion when it attracted funding from major investment firms like Softbank Group.

Downfall- 

WeWork’s downfall came with its failed IPO in 2019, followed by the pandemic and mounting losses. After its planned IPO fell apart, investors questioned the company’s profitability and became willing to invest in the firm. The Pandemic didn’t help either, with lockdown announcements, many people canceled their memberships, causing loss to the company. The startup tried to get back on track under new leadership but struggled to regain its former status, and in 2023, it officially filed for bankruptcy. 

Juicero: 

The Silicon Valley startup Juicero provides IoT-enabled vegetable and fruit juicers designed to work on wi-fi. The firm aimed to make juicing easy, clean, and fast. The juicer used pre-packaged fruits and vegetables, and it was supposed to detect if the packs were expired. During its peak, the firm raised $120 million to develop innovative products.

Downfall-

The Juicer company faced downfall because it failed to convince its customers of the expensive pricing and need for the expensive juicer. Buying ingredients from the market and juicing at home was much more affordable. Juicero closed in 2017 after seeking a buyer for the company, highlighting the importance of product-market fit.

Theranos: 

Theranos was established to revolutionize blood-testing technology and deliver accurate results with few blood drops. The company had a valuation of billions of dollars before it was exposed to fraud. The highest peak of Theranos was a $9 billion valuation in 2013. The company’s promises for enhanced blood tests later turned out to be deception, and the technology they claimed to use never existed. 

Downfall-

The US Security and Exchange Commission charged the firm with fraud in 2018. The investigation officially stated that the company used fraudulent practices to cover up its failures. This downfall provides a lesson about due diligence and ethical leadership. 

Quibi:

The on-demand video streaming platform allows users to watch shows that are exclusively produced for Quibi. The application offers a personalized feed for users to search for shows and watch videos depending on their moods. The startup aimed to transform streaming platforms with high-quality and short-form video content designed for mobile users. The company raised $1.75 billion with A-list content creators during its peak.

Downfall-

The firm misjudged customer behavior and overestimated the market demand for premium short-form video content. The company struggled to compete with other social media apps and streaming services. These wrong decisions and failed market research led to Quibi becoming the shortest-lived unicorn and shutting down six months after its launch.

Lessons to learn from these downfalls:

1. Due diligence: Conducting detailed research about the company’s business model, target audience, financial health, and market potential is a crucial step before investing in the startup. Founders must validate the business model with real consumer data.
2. Active engagement: An investor should also provide active participation and support to the portfolio company while offering guidance to mitigate risk. 
3. Focus on profitability: Analyzing if the company will generate consistent profit is more important than its rapid growth using aggressive funding rounds, often leading to unstainable burn rates. 
4. Transparent Governance: Companies must have robust corporate governance practices with clear accountability to maintain investor’s trust and prevent internal conflicts. The startup must be prepared to pivot when market conditions change. 

Slack’s success Story of Turnarounds:

Slack is one of the most successful pivoted startups in the tech startup ecosystem. Slack learned from its past failures and pivoted from a gaming company to an online business communication platform. The company recognized the flaws in the application and pivoted to focus on solving enterprise communication issues. The company’s game glitch struggled to gain traction despite the investment. However, pivoting solved the problem of business communication tools and made it a successful startup.

Conclusion :

The startup is known as a unicorn once it crosses the valuation of $1 billion. Becoming a unicorn is much easier than maintaining its status, some of the biggest unicorns faced downfall. The collapse of these unicorns offers a lesson for future entrepreneurs and investors. Failure is a step towards innovation, and learning from past mistakes is the key to success. Startups must focus on sustainable growth, flaws in business models, and market trends to prevent its downfall. 

The future of unicorns depends on their ability to survive in the competitive startup ecosystem. If startups can navigate these challenges, they can maintain their position and become an emerging player in the industry. The article mentioned the fall of well-known unicorns and how failure could be a lesson for future investors to succeed in the market.