We often get asked what type of startups we invest in or like to support. In recent years, the boom experienced by startup unicorns in terms of funding, press and overall growth has been outstanding. Such is the case that even incumbents have recognized their threat partly because these types of startups have lots of funding access available to them to innovate further and disrupt the market (e.g. Revolut in fintech). As such their potential is very high, with vc funds looking to support them as it also makes sense for their own business model.
However, as the venture capital industry develops further, we are beginning to see a slight new focus, not on the now standard unicorns, but on startup zebras. What a zebra is and how it’s defined is very much talked about these days. At N3F we like to define startup zebras as being:
Startups that are focused on developing a sustainable business model, that rely on customer acquisition and sales to finance operations as well as growth.
These startups focus on solving important industry or market problems that make a difference. While these markets may not be as big as in the case of unicorns, the problems zebras solve are still important for their (niche) target markets, thus enabling a business model. Furthermore, the operations of zebras tend to positively impact society and/or the environment as they don’t operate a growth at all costs model. Lastly, zebras don’t typically raise a lot of external (vc) funding as they often like to keep ownership of the business and grow at a slower (than average) speed — their goal is not to take over the world but to meet the needs of their direct customers, investors and other stakeholders whilst making a difference.
Although it sounds great, the downsides of being a startup zebra are also worth taking note of. Less access to venture capital funding, a (potentially) slower growth curve, developing a sustainable business model and measuring impact are some of the challenges that all zebras face. A common issue for instance is combining a revenue/operations model with sustainability — i.e. making your business model truly sustainable, which can result in increased costs or difficulty in sourcing materials for example. Measuring the impact of the business is also something that is relatively new in today’s business landscape. While there are great frameworks and models available such as the SDG’s by the UN, IRIS, and the IMP that are widely used in the world of impact investing, implementing these can require some additional expertise and pose as a challenge when putting together a performance dashboard for monitoring results.
However, if we look at the pros of being a startup zebra in today’s investment climate and society, it’s clear that zebras’ focus on impact is an added plus if compared to traditional for profit only businesses (incl. startup unicorns). As concepts such as sustainability and circular economy slowly start becoming the norm and economically advantageous, having a business model that yields a net positive impact on society and/or the environment means being at least one step ahead of competitors be it incumbents or other startups.
Moreover, one of the overseen advantages of startup zebras is the fact that they typically grow at a slower rate. While this may initially be seen as a disadvantage, if coupled with the fact that they have less pressure from investors to achieve product-market fit and scale means that they have more room to test products, features and new ideas. Not having a funding runway of 12–18 months to dictate the development of things can allow the team to have more room for testing and doing research on what works and why. For example, something that did not work this year might’ve worked in a couple of years from now due to new trends, more adoption of a technology, adapted legislation etc. This ultimately helps to acquire customers that essentially fund the business further, developing a solid base from which to grow in the next 5–10 plus years. Once a sustainable revenue model has been identified, scaling the model usually becomes the next step. Should a founder opt to raise funding at this stage she/he would also have a bit more leverage as the startup could grow further without it, i.e. external funding becomes a “good-to-have” as opposed to a “must-have”.
So what does this mean for traditional vc’s and their investors? It’s well-known that a vc fund requires a handful of large exits to return the entire fund and make a profit for their investors. Unicorns being part of this strategy is a target of many fund managers as it is otherwise more difficult to achieve the desired returns on the investments made. As such, increasing investment in startup zebras is likely to happen slowly over time. According to TechCrunch there are even cooperatives being formed to assist and help fund “underrepresented” founders through affordable debt and equity financing. For us at N3F, we aim to support zebras with business development and revenue-based funding. We understand that founders of startup zebras also require support, network, insight and the experience of vc’s but want to grow the business on their own strength and grind without having to raise a series of funding rounds to achieve success. Additional risk does come along with such a model however, we are confident in our ability to find the teams that will make a difference and willing to make bets based on solid data. As such, we place a lot of emphasis on teams as we typically work with very early-stage startups (e.g. Proto, Pre-Seed, Seed). Doing so means partnering with startups that are still developing their business model and MVP to collectively create a sustainable venture that generates a decent return whilst having a net positive impact from its operations, be it through e.g. job creation, social community programmes or ethical sourcing.
The bottom line is that zebra founders can have an upper hand on their unicorn counterparts. We see that many of them are able to turn their passion (and expertise) for a particular field into a flourishing business that can change their communities. Are you a young startup zebra or are aiming to become one? Feel free to reach out to our team and tell us what you’re working on. If you want to learn more about us, be sure to check out our thesis.
All images in this article were sourced from Unsplash unless otherwise stated. This is an excerpt of a medium article. To stay in touch and receive our blog updates, please follow us on twitter.