Overpromising and Other Lessons Learned From Failed Unicorns

Since unicorns — valued at more than $1 billion — are given valuations based on the promise of future growth, it’s not surprising many never live up to their potential.

In Entrepreneur Magazine, guest writer Daniel Neiditch highlights five major pitfalls that prevent unicorns from actually living up to the hype.

Where the Word “Unicorn” Comes From

The term was popularized by investor Aileen Lee of Cowboy Ventures in a 2013 TechCrunch post, “Welcome To The Unicorn Club”. Lee’s team counted 39 U.S.-based software companies started since 2003 and valued at over $1 billion, which worked out to about 0.07 percent of venture-backed software startups. Billion-dollar startups were rare enough to deserve a mythical name.

That rarity is part of the problem Neiditch describes. A private valuation is a bet on what a company might become, set by investors who expect a big return. Once a startup carries that label, it’s under pressure to grow into it, and that pressure can push founders into the mistakes below.

Overpromising

“Lofty goals are an important thing to have,” he writes, “but your business can’t be based on something you’re not ready to deliver.”

Neiditch’s main example is Theranos, the blood-testing startup that claimed its tests could perform health assessments far beyond what was already possible. Its promises didn’t hold up, and its leaders were eventually called to answer for them.

Not Valuing The Workforce

As the vital cogs that keep a growing company’s engine moving, it’s important to value the contributions of your employees.

Here Neiditch points to WeWork, the coworking company. He writes that its spaces were the subject of labor disputes from cleaners seeking better working conditions, and that the company’s response caused lasting damage to its image.

Trying to Grow too Fast

Be patient. Don’t give into the temptation to spend like a big company.

Neiditch’s example is Fuhu, a fast-growing children’s tech company whose revenue projections ran ahead of its accounting team’s more realistic estimates. New products meant to close the gap flopped, he writes, leaving it $100 million in debt to its supplier. After declaring bankruptcy, it was bought by Mattel for a small fraction of its original valuation.

Dishonesty

Be honest with customers (and employees too).

For this one, Neiditch turns to daily fantasy sports companies DraftKings and FanDuel. He argues their advertising suggested big winnings were within reach of every user, when in fact a small minority of dedicated players won most of the money, and that the practices drew criticism from several state attorneys general.

Ignoring the Competition

A great idea is one thing but you need to prepare for the competition you will almost certainly face down the road.

Neiditch’s final example is Evernote, the note-taking app that drew plenty of attention and venture capital, and that Business Insider once called “the first dead unicorn.” As a startup grows, he warns, it has to be ready for established players in its field to strike back.

What Happened to Neiditch’s Examples

Since 2017, the stories have gone in very different directions, and that’s a lesson in itself.

Theranos became the defining cautionary tale. Founder Elizabeth Holmes was convicted on four counts of fraud related to defrauding investors, and in November 2022 was sentenced to 11 years in prison.

WeWork’s troubles got much worse. Its 2019 attempt to go public collapsed, its valuation was cut and co-founder Adam Neumann was ousted. The company later went public another way, then in November 2023 filed for Chapter 11 bankruptcy protection, a stunning fall for a company once valued at $47 billion. NPR reported that its business model, built on long-term leases for space it couldn’t fill, came crashing down.

DraftKings went the other way. After a 2018 U.S. Supreme Court decision allowed states outside Nevada to legalize sports betting, it launched its first legal online sportsbook in New Jersey that August, and in April 2020 it became a publicly traded company on the Nasdaq. Neiditch’s view that the fantasy sports companies’ reach had dwindled to nearly nothing didn’t hold for DraftKings.

Evernote is still around, but under new owners. The company was acquired by the Italian tech company Bending Spoons in November 2022.

What It Means for Founders

Neiditch’s five pitfalls are mostly about the gap between the story a company tells and the business it actually has. Overpromising, spending ahead of revenue and stretching the truth with customers all widen that gap. Treating staff badly and ignoring rivals make it harder to close.

A big valuation doesn’t protect against any of that. If anything, it raises the stakes, because investors, employees and customers have all bought into the story. The safest course is the dullest one: promise what you can deliver, grow at a pace your revenue can support, and be straight with the people who depend on you.