8 Ways to Build a Unicorn with 1 in 40 Roulette Odds - E484

Jeremy Au defined startups as newly established businesses bringing future technologies to the present, with unicorns being those valued at over $1 billion. These valuations are typically driven by revenue generation of around $100 million annually and market confidence in future profitability, eg. Palantir and Salesforce. Private markets apply valuation multiples based on future growth potential, with speculative booms in sectors like crypto, where revenue valuation multiples went as as high as 1000x due to bull markets. The odds of achieving unicorn status (about 1 in 40 for USA startups with venture funding) and outlined eight strategies for building a unicorn (Christoph Janz). These include models like “whales,” serving high-value clients, and “rabbits,” scaling by targeting many smaller customers. He emphasized that becoming a unicorn requires long-term execution, strategic positioning, and navigating indirect competition, particularly in Southeast Asia’s fragmented markets.

Conduct predictive carbon modelling and more using AI with Nika.eco, this month’s newsletter sponsor!

Have you ever wondered how governments decide where to best strategically place telco towers, hospitals & nursing homes? Or perhaps how insurers price premiums based on sea level rise and other climate risk? More so than ever in this age of machine learning, these critical decisions today are being supported by large geospatial models that are trained with millions of spatial data points. However, such computing environments can be incredibly complex, expensive and tedious to set up. Nika.eco offers a DevOps solution that significantly saves cost and time by allowing researchers and data scientists to create an optimised geospatial machine learning environment with just one click. Reach out to info@nika.eco if you are a geospatial data scientist or climate researcher who is interested to partner on a pilot or research opportunities.

(01:02) Jeremy Au:

I want to talk to you very much about what startups are, because technology is a function of someone bringing the future to today.

And for the definition of our conversation is that a startup is a newly established business. So it is a business that has come into existence. Now the question that we have today is that we often hear about this company called Unicorns. And Unicorns seem like this amazing thing that's happening.

Now, for the purpose of our definition, a Unicorn is a startup that is worth over a billion dollars. So, you hear Unicorn this, Unicorn that, just remember it, the enterprise value of that is worth over a billion dollars. Now, for people who are interested in finance and so, so forth, the way we should think about it is that it is composed of two components.

First, it is the revenue, whether you're a tuition center, whether you're a bakery, is making a hundred million dollars of revenue on an annualized basis is one way to think about it.

And the second thing is that the public markets, the public equities value your business at a multiple of 10X. So it's worth 10 times higher for that because we believe that the dollar you earn today, you will earn the equivalent of 10 times more of that profit over the course of the lifetime of this business.

So that's what a unicorn is. Unicorn on average is about 100 million of annual revenue times a 10X price to revenue valuation multiple. So for example, if you are a trading company, you are a consumer packaged goods company, you're probably not going to get a 10x multiple. You're probably going to get a 2x multiple or 3x multiple, for example.

So in order for you to become a billion dollar company, you need to have reached 300 million dollars. We also saw the opposite of that. We saw that in crypto, the time that we had was that some companies were doing about a million dollars of revenue, and then their multiple of price of revenue was like a thousand x.

Because people were going crazy on that. So people were saying we have a crypto unicorn and we make a million dollars of revenue because people are valuing us at a thousand times. So this is, you want to think about that all the time because those are, you hear a lot of people say I'm a unicorn.

I'm not a unicorn. This unicorn got dehorned. This unicorn is gonna be there. It's a decacorn. But you just have to remember that there's implied judgment in that sense, right? So the revenues is a known quantum, but there's a judgment of the future profitability and the revenue growth of that company. So you have to be thoughtful about that whenever you hear about a Unicorn.

So, Unicorn is a startup that's worth over a billion dollars. I guess the question here is even you raise $1 million of seed capital, So you raise a million dollars, you pitch and you got, money from a VC in America, what are the odds that you become a unicorn?

Is it one in 20, one in 40, one in 60, and one in 80? Well, I have good news for you. The odds are 1 in 40. It is actually much easier to become a millionaire or billionaire than you currently think. Now, of course, maybe some of it is because you're been raised in a Southeast Asia environment, the ecosystem is a bit harder. So maybe you're thinking about it from that perspective. But I think it's useful for you to think about it, is that actually the chance of being a unicorn is about 1 in 40.

That's roughly equivalent to a roulette wheel. Roulette wheel, for those who do sports analysis, clearly would never do something as crass as roulette. But if you were to do roulette, there's about 38 numbers on that wheel. Maybe 37, depending. And so, it's roughly about the same odds. Of course, the truth is, startups are hard. It's not just a spin of the wheel. It's not just a bet. It's also the fact that you have to do that work, you have to do that work for five years, ten years, fifteen years, twenty years. Mark Zuckerberg is still working at his first startup, which is Facebook, and now he's doing all kinds of different things.

And also, there is an indirect competition with 37 other players. So, you're not fighting them, you're not like, punching them or whatever it is. From the eyes of the market, all of you at this point are the same. All of you have been savvy enough, smart enough, hardworking enough to raise a million dollars from a VC to give you that money. And now you're all in indirect competition. The same way you're competing for weightlifting or competition or some sort of judgment competition. But all of you are trying your best. You're not trying to compete with each other, but there is that indirect competition.

(05:02) Jeremy Au:

And so the good news, it's more possible to build a unicorn than you currently think it is but now I'm going to give you eight different ways to build a unicorn. So this is a helpful way because I want to open up your mind that you don't need to do finance. You don't need to do consulting. You could potentially be a founder and figure out a way to build a unicorn, a billion dollars a company.

So the whales are that you have ten companies, you service ten companies, and you charge about ten million dollars a year. And so a company like Palantir that serves the government probably only has about four customers actually today, but they're charging each one like a hundred million dollars each effectively today.

So the U. S. government, the Palantir, and I've seen those videos, they're like, we want to map out somebody in the Middle East of their family connections and their friends and converge on their WhatsApp communications. That's what Palantir does. So there's a whale.

Then you have Workday, right? Which is a Bronto. So it's charging about a hundred companies. You're charging about a million dollars. So this is your kind of like your mega Salesforce, right? That has been doing a lot of it. But Salesforce probably charges about 100,000 to a couple of hundred thousand dollars per year. And they have about a thousand enterprises that are using Salesforce.

And the joke about installing Salesforce is that you can never uninstall Salesforce. So you are stuck using Salesforce no matter what. And then you see companies like HubSpot and some of you may already seen it or heard of it, but it's a company that's going and attacking Salesforce. So they want to charge 10 times cheaper than Salesforce. And so they're charging about $10,000 per year and they're servicing about 10,000 medium sized enterprises on average.

Then you have Rabbits, which are about 100,000 small businesses by charging about $1,000 per year. Many of you may already have started to see some of that in your course of your work because that's about $100 per month, Which is quite a reasonable cost of software in Southeast Asia for about that $100 per month subscription.

And then, of course, you see your mice. So, there's about a million prosumers. So, these tend to be professional users and they charge about $100 per year. And so, many of you already, for example, are already doing this.

If you pay for ChatGPT today, they charge you about $20 per month. The cost of a year is about $200. And they have more than a million users around the world who are paying for ChatGPT. So, ChatGPT, even though it it is a billion dollar company, it is actually based on a business model right now of servicing mice.

And then we have your flies, which is about 10 million consumers, for example, charging around $10 per year. So this is starting to approach some of your advertising, your sponsors, your TikTok, but if you are on TikTok and you bought something on TikTok Shop, For example, you have made that transaction happen. So these are your flies.

And then lastly, you have your microbes. So these are your hundred million consumers. And on average, people only spend about a dollar per year, right? So WhatsApp technically is a free product for all of us, but there's a lot of WhatsApp shops and channels. They're trying to test advertising and so forth. So these tend to be a free products because one dollar per year is effectively saying that I'm trying to make about 10 cents per consumer per month.

So these are the eight different ways for you to do unicorns. So previously you thought there was zero way to make a unicorn, but now you know that there are eight different ways to build a unicorn.

In order to become a unicorn, you need to have a special sauce or a product. But wouldn't it just get stolen? And the answer is, it's correct. Do we know that the thumb drive was invented in Singapore? The thumb drive, the first ever thumb drive. So at that point of time, Singapore was making MP3 players because we were the Malaysia of manufacturing at that time, right? So a lot of our parents had their first HP job or tech jobs, they were assembling MP3 players. And a Singaporean guy basically said, what if I remove the MP3s, I remove the player, and I just do a thumb drive. And so he created a thumb drive and he thought it was going to be rich. Turns out he was not, because across the ocean in Shenzhen, they all decided that he had made an amazing journey, and they all copied his design to death, because his secret was not protected.

Now he filed some patents, he tried to lower lawsuits. By that time, China did not have a strong IP protection regime. So that guy, unfortunately, he came out of it. He invented it. He became a millionaire. By then he never got to become a billionaire because he should have.

On the other end of the scale, you actually have biotech and pharma where we have very strong IP protections. So in other words, if you design a pharma pill, for example, you design Viagra, you design Mordena, you have IP protections because America will say that if you manufacture my drug, then the US government will protect the company's ability to retain that profit, but also retain that intellectual property. Now, what we also know is that South Asia or India allow generic industry to exist.

In other words, any drug that is made, even though it is protected in any part of the world, in India, it is totally legal for you to generate a generic version of that drug. So the Indian government has basically said, if all the American government, you do whatever you want, but I will protect because I want my citizens to have the cheapest medication. But what's interesting is that as a result, India doesn't have an RnD machine or pipeline for drugs.

Almost all drugs, the unicorns that you see there, Moderna became a unicorn. Pfizer became a unicorn. These are companies that were born and bred in America and the American alliance, western places like the UK, Singapore, all of us are part of that world order where we agree to protect the supernormal monopoly profits for a period of time for biotech.

Now, that's also true for Disney. So you and I can't make Walt Disney stuff. Obviously some things are coming out of copyright, but basically the governments around the world have basically said, if you write a book that is special, like The Handmaid's Tale, or House of the Dragon, or Game of Thrones, or Lord of the Rings, we will protect the ability to make money as an author

For 20, 50, 100 years, whatever the time frame is, to allow you, because we won't allow other people to copy your stuff because if you can copy your stuff, then you don't make any money, right? Then why would you be doing writing? So the government has decided to protect that. So similarly for startups, a lot of start ups will choose to focus on patents, will choose to figure out on their secret sauce, the algorithms and so forth. So there's a very interesting debate by society because to innovate, you have to invest money to create a future. But if you create a future and you're not allowed to make money from that future, then you don't bother creating. And so, in order for a capitalist, like a venture capitalist or finance people, to put money into you today, they want to know that there's going to be money in the future. And so, the startups have to protect their own ability to do that thing. But they also have other advantages. They have speed. They have distribution. They have economies of scale. They have the ability to lock up talent. There are different ways that a startup can do to hoard as much of that competitive advantage, so that as long as possible, nobody else can make money the way they do.

(12:01) Jeremy Au: So what we are seeing in the world today is two things. I think what's really interesting is that first of all, more people on the world are on the internet than ever before. If you think about it, at one level is 50 years ago, nobody was on the internet. Zero. And now, most people on the world have internet, right? And you see that even, for example, the Philippines is one of the biggest e-gaming places in the world because for them, they went straight from they didn't have PCs and laptops, they went straight to mobile gaming, and LAN cafes, so they built the eSports culture, right? And so, what I'm trying to say here is that there is almost like two groups of people coming up.

The first trend is a lot of people are on the internet for the first ever time, their first generation ever. And so, there's literally billions of people who are now available. And so, the interesting thing is that anybody in the world, if you're in Africa, you're in Philippines, wherever it is, if you want to use ChatGPT, you can use it. You pay 20 bucks, that's pretty high from their perspective, versus their GDP per capita. But you just pay for it, and they get the world's super intelligence in their pocket. And so I think there's one trend, which is that companies are realizing that they want more scale. They'd rather have more people use a product cheaply than to have a higher, expensive product.

So as a result, historically, in the earlier ways of the internet, they tend to be more in the center of this, charging a hundred, charging about a thousand, but then now people are moving towards the bottom of that, trying to get to the microbe level because they say TikTok is like, I'd rather have everybody use my TikTok and then figure out how to sell one vitamin for every 10 consumers, because of that mass scale that wouldn't really have been possible when only America upper class had the internet 30 years ago. So that's one big trend is the scale and the volume, but also the synergies of having more training data is making it more valuable to have as much consumer data as possible.

So the only people who can make AI models right now is ChatGPT, because they basically disrespected copyright and looked at everybody online stuff without paying anything for it. And then there's Facebook AI because they have access to your WhatsApp, your Instagram, and your Facebook. And so they have all that data internally. Google can build one really great because they have all of YouTube and all the search results. So they want as much data so they're hungry to make one cent per user because they just want to give it everything for free. So there's a big push from the consumer perspective. We see more and more free stuff at the bottom of the scale. But then they're making money on that.

But the other end, I would say, of the trend, is that we see more people starting to buy at the whale level. And what that means is that historically, the fastest adopters for all this technology tended to be small businesses or prosumer. So these are the nerds, the geeks, the business people trying to get productivity. You have 10 people, 100 people, it's easier to do. But now, we see a lot of governments trying to digitize, right? You see Singapore in GovTech. You see the US military. You see, a lot of stuff that's out there. And so, the government is willing now to work with startups to a much greater extent.

And so if you look at SpaceX, they are a billion dollar company, and almost all of their revenue comes from the US government. And so today, we have a Boeing that used to build these spaceships and rockets to fly astronauts, and then their new rocket, unfortunately, has failures, and now they're stuck. The astronauts are stuck, they're supposed to be there for a few weeks, and now their mission will be extended for six months! And the company that they're currently thinking about bringing them back on is SpaceX, which only came to existence about 10 to 20 years ago, not really that long. So the government is paying for almost all of the revenue of SpaceX.

And so we actually see that as well for other things. I was meeting with a VC in America, and he basically said that the conflict in Europe exposed that America does not know how to manufacture anti-tank guided missiles anymore. So they don't know how to make Javelin missiles anymore, and they're sending all their inventory over, but they can't make new ones, because all the people who made them were all retired now, right?

The stuff that they made in the 1960s, 1970s. So the government is interested in buying from startups, and they want to buy millions of anti tank guided missiles for a startup that's willing to design it for them, obviously incorporate the latest technology and so forth. And so I think you see the other end of the scale is that, and it's not that the middle is weakening, but you see that push where the power of data and scale pushing people to the cheaper side, but you also see government and national efforts moving to the top on the left on this side as well.

(16:02) Jeremy Au:

In every country in the world, there are advantages and disadvantages. So if you're in America, which I just came back from, it's a red ocean, it's a blood bath. If you want to be somebody who's doing the best AI and so forth, the best researchers, you're doing this out of America. But they feel like they don't have opportunities to build basic businesses. But if you go all the way to Indonesia, for example, or you go to Vietnam. In Vietnam, there's a great story. They brought Singaporean ice cream sandwiches to Vietnam, and now they're making a lot of money, because it turns out that the new emerging Vietnamese middle class really wants to eat ice cream sandwiches.

And so, an American in America would be like, oh my gosh, what an easy way to make money. Why can't I be in Singapore? And also when you look at this class, a lot of people want to do finance because Singapore is the finance hub for the region.

Whereas, if you were based in Malaysia or Thailand, it's difficult to get a finance job because they are not finance hubs for the region. So, to some extent, you have grown up with some path dependency because you believe that job is good because your parents, the career counsellors, is feeding you. Singapore is good at finance, supply chain, consulting, and education. So guess what? Everybody here is like naturally herding into those behaviors because those are the things that we're good at.

Whereas if you're in Los Angeles or New York, when I was there, a lot of people will want to be musicians. They want to be artists. They want to be improv comedians, because if you want to be successful, you can make it in Hollywood or New York. I will hang out people who work on Saturday Night Live, and then they'll do comedy routines at night. And that job career was very viable for them. And so you could build a comedy startup on top of that as well.

So, what is important for us to understand about the course of technology is that this is an abnormal part of human society. So, for the past 100,000 years of human civilization, if you think about it, of humans, eating, living, breathing, sleeping, but they've done it most of the time for effectively, or the economic equivalent of about a hundred dollars per year. So this is an economist point of view to be like, for most people, there was this hunting, cooking, farming, child rearing, whatever it was for hundreds of thousands of years.

And it's only if you look at this Y axis, international dollars. This is the normalized scale from 10 to 100 to 1,000 to 10,000. But if you look on the X axis, for the past 100,000 years, to the past 10,000, 1,000, 100, 10 years, 1 year, most of that growth has really happened about 1,000 years ago.

So only has the past 1,000 years have we had a different life than our parents or previous parents. In other words, a family 50,000 years ago, or even 3,000 years ago, they would have probably said that life was the same for their parents generation, or their grandfather's generation. And they would believe that their children would have the same life as them, that their grandchildren would have the same life as them, that their great great great grandchildren would always have the same life as themselves or their great grandparents.

Most of human life was static. Only in the past 1,000 years have we seen the tremendous change of economic value output or a change in lifestyle. So that today, all of us now take progress to be a given. It is inevitable that our computers will get better year on year. It's inevitable that self driving cars will come one day.

It is inevitable that finance will get better. It is inevitable that we will get a better life. And our children will have a better life than we do. And so, this is a very abnormal, confusing state for humans because we are all monkeys strapped to the fuel of old dinosaurs. Ground into oil using supercomputers that mimic our brains. Kind of crazy. That's the kind of process that we are. And so what's important for us to understand is that a lot of this change has also happened if you look at it again, again, over the past 60 years.

And so if you look at the economic activity of the global average of income, you've seen that over the past 60 years, on a per capita basis, it has grown from effectively a few hundred dollars to now over 11,000 on an average annual basis, which is again, a crazy thing to think about. And It keeps growing. It keeps improving.

But you have to remember that their GDP per capita is still at about $10,000 plus. Whereas in Singapore, in America, we enjoy the same level of national wealth on a per person basis. In fact, if I add this chart and we put in the UK numbers, our GDP per capita is higher than the UK.

And as my French professor would like to say, isn't that interesting that the former colonial master used to have a higher GDP per capita of the colony, but now the colony has a richer, material lifestyle than the United Kingdom. The country of Cambridge, Prime Ministers, and British comedy, English, right?

So, it's kind of an interesting thing to think about, is that all of us in this room are very lucky, because we are born in a time and a generation where the future will be better than our time today. That our lives are better than our parents' time, and that even in this historical context of tens of thousands of years, a hundreds of thousands of years, because by fate of luck, you could have been born, your soul could have been born at any point at that time.

But at this time, you are also born to be in Singapore, that you have the equivalent wealth of an American, what people consider to be the number one country on Earth. And we do this from Southeast Asia, where our peers are an order of magnitude away from where we are.

(21:52) Jeremy Au:

So again, our GDP per capita is about $60,000. And if you look at Malaysia or Thailand, they're pretty much around 10,000 to 15,000 right? So effectively, a 5X difference, in production from Thailand and Malaysia. And if you look at Indonesia and Vietnam, their GDP per capita is around 5 to $10,000 and the Philippines. And so again, we have a 10X order of magnitude.

So, at this time, you were lucky to be born or your parents migrated to Singapore, your great grandparents, but you live in a country today, there's a 5 to 10X wealth compared to our nearest neighbours. And it is a 10 to 100x compared to the lives of our grandparents and our great grandparents. This is a lucky moment.

And so all of us around this place have to make sure that we understand why and what has happened. And then, with this privilege that we know about our position and our wealth, to be thoughtful about our careers and how we're going to give back, and how we're going to make sure that the future continues to progress for everybody.

So, again, we just want to be thoughtful that countries make decisions about policy, about infrastructure, about education, and all of them are key to how countries are. And I can tell you right now that I am very lucky to be in Singapore because if I was in a different country, no matter how smart, no matter how hardworking I am, no matter how cunning I am to pull myself, you can't fight the gravity of the economy of the whole country. And so I think all of us should really thank our lucky stars to be here.