The desperate search for unicorns

This article was originally written in Spanish by Pablo Fernandez, General Manager of Chilean VC Fondo Alerce, for Diario Financiero.

Unicorns are mythical creatures, horses with a horn on their forehead. They have existed in our mythology since 400 BC. In these stories, unicorns could only be captured by a virgen and its horn was said to have the power to render poisoned water drinkable and to heal sickness. As you can imagine, unicorns were a highly-demanded asset.

More than two thousand years later, unicorns are back in the spotlight, but today they have a different shape. Now unicorns are startups valued above one billion dollars by investors with deep pockets. Everybody is desperately searching for them, and in Chile investors frequently discuss why we haven’t created one yet. This fact mortifies us, because our neighbor Argentina has six and Brazil has eight, adding another one to their list last week. Even Colombia already has two. So why doesn’t Chile have one?

We are an extremely conservative country, with too many public subsidies, too much aversion to risk, and entrepreneurs with a lack of global mindset, etc. This list of reasons is long, but not as long as the list of creative solutions created to solve them.

The idea of developing a venture capital industry with a primary goal of investing only in unicorns in shortsighted, and a tremendous mistake. The group of investors behind Founders Fund (ex-Paypal) wrote a manifesto where they compared the startups founded in the 1960s to those founded in the early 90s, including computer hardware, superconductors, biotech, and the internet. None of these companies were entering a space with billions of users, their business models were unclear, and chances of success were minimal.

However, all of the entrepreneurs had a vision about how their technologies would change their world, a vision that was supported and shared by their investors. This all changed in the late 1990s, when the industry moved away from transformational technologies to more niche solutions, sometimes even focusing on misplaced problems. Nonetheless, startups at this time beat records in transactions, but also saw valuations become a bubble.

It may be easier to write this kind of proposal after hitting the jackpot with a company like PayPal. However, the main question that we must now ask ourselves is what kind of industry we want to push forward. The main contribution the venture capital industry could bring to Chile (and South America) is the possibility to radically impact people’s lives by financing and supporting new services that could improve quality of life. This goal does not mean that we should not look for financial return, but we have to prioritize correctly. The frantic search for unicorns might easily lead us to fall for a new Theranos, or let our investors become blindsided by the next Chang.

Read more in the original article in Diario Financiero.

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