What it takes to build a billion dollar tech company, and what it means for startups in the Arab world

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Yesterday, Aileen Lee of Cowboy Ventures took an honest look at what it takes to build a billion dollar company in Silicon Valley today.  After looking at public data on 39 companies that launched after 2003 and grew to a valuation (either public or private) of over $1 billion within the past 10 years, the Silicon Valley-based VC concludes that it’s rare and difficult- only around 0.07% of companies founded today hit the billion mark

While much of the data focuses on the U.S. market, some of the conclusions about these so-called "Unicorns" could translate to the Arab world (for all of the findings, read the original article): 

  1. The rise of unicorns has coincided with a wave of technological innovations. In the 1960s, it was the semiconductor; in the 70s, the personal computer; in the 80s, networks; the 90s, the internet; and in the 2000s, social networks were built. Facebook, now valued at $122 billion, is far and away this era’s biggest unicorn.
  2. Consumer-focused companies have created the majority of value over the past decade. Facebook, Amazon, and Google have far surpassed most other billion-dollar unicorns, and, among these 39 companies, consumer-focused companies have generated more than 60% of aggregate value. 
  3. Enterprise-focused companies are generating better returns on investment. Consumer-oriented companies may be generating more value overall (and there are more of them), but enterprise-focused companies have generated more value per private dollar invested. Most are worth 26x the amount of capital they’ve raised, with a few reaching a valuation of 60x their investment. In comparison, these consumer-focsued companies, on average, are worth 11x the investment they've raised.
  4. Four main verticals are accounting for the majority of unicornse-commerce (especially those that don’t hold physical inventory as a key part of the business model), audience/content businesses, which are free for consumers and monetize via ads or leads, software as a service (SaaS), often consumer-facing cloud-based software services, and enterprise companies that charge companies for large-scale software. Of those verticals, e-commerce companies have delivered the lowest returns per dollar invested. 
  5. Cofounders are experienced. Most founders of these billion dollar companies are over 30 (34 on average), and most have at least one cofounder, with three cofounders on average. Ninety percent of teams have past history working together, while 80% had at least one cofounder who had started a company before. Most also attended selective universities.
  6. IPOs don’t come overnight.  The companies on the list that went public took over 7 years, on average, to do so. In the Arab world, it might be safer to think about exits as acquisitions, or to not think about them at all.
  7. No current tech unicorns have women cofounders. Wow. (Perhaps Gilt Groupe needs to reconfirm that $1 billion valuation).

In the Arab world, the majority of investments in early and growth-stage startups in the past couple of years- made by the region’s most active venture capital firms- have gone to consumer-facing startups. Just take a look at the portfolio companies of MEVP, some of STC’s investments, the companies BECO Capital has funded, and others like Silicon Badia, SadaraVodafone Ventures, and Wamda Capital). Ideavelopers may be one of the few VCs in the region with a portfolio of over 50% B2B companies.

In a tough emerging market, businesses that have a solid business plan and are already generating revenue are often more appealing to investors, but this doesn’t necessitate that a company focuses on a B2B model. B2C is faster to scale, but more vulnerable to market shifts; B2B customers, as Walid Mansour of MEVP points out, are “harder to lose." MEVP, he says, doesn’t prioritize one over the other, looking at companies on a standalone basis.

The difference in return on investment in the U.S. for B2C and B2B companies is worth looking at, yet if there’s one take-home from this data that's most relevant for the Arab world, it’s perhaps that, although e-commerce accounts for 85% of the total amount invested in tech startups in the Arab world last year, it’s not the only big bet out there when it comes to scalable tech verticals.

As e-commerce evolves, discount sites in flash sales and daily deals are likely to add or pivot into full sale verticals this year before they’ll be generating the returns their investors would like to see. Some of the region’s most prominent acquisitions over the past year have been in media and digital media services, while SaaS- especially cloud services- are likely to rise, as cloud workload grows faster in the Middle East than anywhere else in the world over the next four years.

Of course, if building a billion dollar company in the Arab world is your only goal, you might as well launch something in telecommunications, petroleum products, or infrastructure (although three of the top ten largest companies by market capitalization are tech startups, most of the largest companies in the world by revenue aren’t).

But if you are interested in building a scalable tech company, perhaps you’d better start tapping (stalking) your pool of college and high school friends to find a talented, educated, non-annoying “serial entrepreneur,” if you haven't already. 

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