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AZ Tech Beat | August 23, 2017

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Arizona makes workhorses—not unicorns—and that’s a good thing

Arizona makes workhorses—not unicorns—and that’s a good thing
Staff Writer

Guest Blog by Hamid Shojaee, founder Axosoft, Pure Chat & AZTB

The Bay Area is overrun with horses—unicorns to be exact. And while I wish I was referring to the horned, majestic creatures of lore, I’m actually talking about privately-held startups that have $1 billion or higher valuations. Venture investor Aileen Lee coined the term about two years ago, and at the time, it made sense. High valuations at young, private companies were a rarity—an almost mythical instance—hence “unicorn.” Today, though, the term is laughable, because Silicon Valley has more than 100 unicorns, and on average, 1.3 unicorns have galloped onto the scene every week in 2015.

People joke that you can never have too much of a good thing, but in truth, we’re always suspicious of an overabundance of good fortune. We ask, what’s the catch? And that’s what’s now happening with unicorns. “Most venture-backed startups run at a loss, but there is a special variant of unicorn companies operating at gross margins that look nothing like traditional software businesses,” said Danielle Morrell in Mattermark. “These companies are in trouble, and will have the hardest time raising.” She cites such examples as DraftKings and FanDuel, both now embroiled in insider trading investigations, that only make $.20 for every $1.00 spent, hoping that customer acquisition will solve all. Then there are companies like Kabam, which must re-acquire customers with every single purchase, and companies like WeWork with “unit economics that just don’t make sense.” Earlier this month, Fortune’s Dan Primack wrote that it’s “last call” for unicorns, explaining that “The past several years of raising too much, too high, too soon has run smack into a much more conservative investor ethos.”

I could pen a massive article synthesizing everything that’s been written over for the past few weeks on the closing “unicorn window,” but you all know how to use Google and I hung up my literature review gloves after I left college. The point is that a large percent of these unicorns are doomed, because the investor market is turning conservative, the possibility of a successful IPO is dwindling, and a time of re-valuation is coming. Too many companies are burning too much money, and with attention shifting to unit economics, many of these companies’ business models are about to be flipped on their heads.

Jet on over to Arizona, where we have our own, albeit warmer and drier, “Valley” (the Phoenix metropolitan area is the Valley of the Sun), and unicorns simply don’t exist. Perhaps it’s the hotter climes, or maybe it’s because investors are too busy pumping all their cash into supremely overvalued Silicon Valley companies to notice us. But we just don’t produce the unicorn-type here, and that’s fine. It’s not our nature to have those types of creatures prancing about our Valley anyway. That’s because Arizona makes workhorses, and we’re proud of it.

Here, we develop products and services that rock, but more importantly, they solve problems. And then we effectively price and market the hell out of them. Now, there are tech companies everywhere that do this. But there’s a big difference between the companies here and those in Silicon Valley: We have to focus on a solid business plan right from the beginning. Because there are little to no institutional investors here, tech companies worry about revenue from the beginning. We hone in on profitability and scale. And because it’s a struggle to get funded, businesses are forced to be scrappy and run lean. We don’t have the luxury of focusing only on top-line growth, and we could never be short-sighted enough to burn significant cash in the name of acquisition or IPO. Because of this environment, startups here have a patience, passion, and dedication unlike those found in Silicon Valley.

I launched Axosoft, an agile project management software, in 2002. It was nearly impossible for me to find investors, so I grew Axosoft organically and profitably. Alternatively, fellow Valley-of-the-Sun-startup WebPT went the route of VC-backing. However, they were only able to achieve that after years of bootstrapping and proving out a profitable and scalable business model. And there are plenty more examples of workhorses: Pagely, a major player in WordPress hosting; SpyFu and AuthorityLabs, both rock solid SEO and marketing tools; Infusionsoft; Trax; ReplyBuy; CampusLogic; Picmonic; Parchment; and AppointmentPlus.

Surprised there are so many tech companies in Arizona? That is just a small fraction of them. And they’re all working toward sustainable businesses. How am I so sure? Because here, you figure out fast how to be a viable business, or you die even quicker. You can ask Bob Parsons, founder of GoDaddy. In its early years, GoDaddy nearly folded before Bob Parsons went all in without any investors. Eventually, GoDaddy’s first round of funding was north of $2 billion. As Arizona’s only unicorn with a market cap of more than $4 billion, GoDaddy is a worldwide brand with revenues higher than $1.5 billion. That’s the definition of a solid company.

Now, none of this is to say we don’t want unicorns here. We’d love it, actually. Hell, they don’t even have to be purebred. Unfortunately, Arizona doesn’t have the environment for such creatures. But as the climate changes in Silicon Valley, perhaps investors should scale back their unicorn hunting efforts and instead turn their sights on the workhorses of Arizona. Because while unicorns hold the promise of big profits, their name says it all: They’re a myth. Meanwhile, workhorses are real. I’d rather bet on sustainability, profitability, and proven business plans—I’m talking revenues in year-one—than anything that’s bleeding or burning. History has shown us that markets are fickle, fast-turning, and jam-packed with dire consequences. Let’s usher in a new era, one where we shelve short-sightedness for smart investments. Screw unicorns; let’s back the workhorses.

Read more blog posts from Hamid at Pure Chat.

  • Agree and disagree

    Agree with the premise stated. Disagree with most of the examples you provided of bootstrapped companies. Infusionsoft? Posterchild for VC back firms burning lots of cash. Will be interesting to see the numbers once they get to IPO, which I believe will be far less tasty than we imagined. WebPT — VC fueled growth with the founders already pretty much exited. Parchment? Software cobbled together from multiple acquisitions, fails as scheduled twice a year when it’s needed the most, and is really just the founder’s gambit to prove himself. The others? Not enough data to decide one way or the other. Of all of them, Axosoft is probably the best example — limited investment capital, a good run, and some potentially viable spin offs. Good luck!