3.

Raise a Camel

Build for Sustainability and Resilience

Keith Davies, CFO of Zoona, was in a tricky spot.

Zoona’s iconic lime green booths dotted many African cities. The company was identifying locations, installing its purpose-built booths, and recruiting local micro-entrepreneurs to serve their communities. Zoona’s agent network offered its customers basic financial services, including money transfers, bill payments, savings, and loans. Keith, along with the three other founders, was committed to offering Zoona customers a high-quality, reliable service and driving financial inclusion along the way.

On the surface, the company was performing well. At the time, its agent network had just crossed more than one thousand booths and was serving more than one million customers.¹ Although Zambia was its primary operating market, the company was expanding to other markets, including Malawi and Mozambique. Zoona had international investors, including Quona Capital and Omidyar Network.² The previous month, it had even become profitable.

But that morning in August 2015, Keith knew Zoona was in trouble. Chinese stocks, on the back of macroeconomic uncertainty, had taken a turn for the worse. China’s demand for industrial materials, including copper, was projected to crater.³ As a consequence, Zambia, where copper sales to China represent 80 percent of exports, saw its currency, the kwacha, drop precipitously.⁴

This was calamitous for Zoona. Its revenues were in Zambian kwachas, but its costs were primarily denominated in South African rand and US dollars, and most of its investors (including debt holders) were looking for US dollar returns. With no effective means of hedging the currency risk at the scale of Zoona’s requirements, Keith knew a decrease in the kwacha meant lower revenues. But with no corresponding decrease in costs, the company would no longer be profitable and investor returns would tumble.

The kwacha decreased to 5:1 and then broke through the previously inconceivable psychological barrier of 8:1. But it did not stop there. It plummeted further. The exchange rate hit 10:1, then 12:1, and finally 14:1—the largest depreciation in the country’s history, and the world’s worst-performing currency for the year. It ended at 15:1, depreciating nearly 80 percent in three months, and fell 115 percent by the end of 2015.⁵

Zoona’s situation was extreme, but, at the Frontier, that’s not unique.

My Other Investment Is a Unicorn

On my laptop cover, I have a sticker, handed out at some startup conference or another: “My other investment is a unicorn.” So pervasive is the myth of the single-horned creature in Silicon Valley that venture capitalists have been spotted donning unicorn costumes at demo days (where startups pitch their ideas)—physical embodiments of this mythical animal.⁶

Why is the unicorn Silicon Valley’s mascot, and what does it represent?

Coined in 2013 by Aileen Lee, a Silicon Valley venture capitalist, the unicorn represents an elusive objective—unique, pure, and perfect—referring to the near-impossible milestone of being valued at more than $1 billion.⁷

Unicorns were once a rare breed. Between 2003 and 2013, only thirty-nine unicorns were started in Silicon Valley.⁸ Historically, billion-dollar valuations were bestowed only on the few startups with the magic elixir of the right teams, business models, profitability, and timing.⁹

In recent years, the stable of thoroughbreds has become much larger. As of March 2019, there were 326 unicorns around the world. A new tier has been created, with 20 companies vaulting to “decacorn” status—companies that have reached more than $10 billion in valuation.¹⁰

Unicorns are not simply descriptors of an end result. Rather, they represent a philosophy, an ethos, and a process of building startups. Like the ceremonial haka dance performed by the All Blacks, New Zealand’s rugby team, as a pregame ritual, achieving unicorn status serves as a rallying cry, uniting a company around a common objective and inciting fear in the incumbents it seeks to displace.¹¹

When being a unicorn is the objective, very rapid growth is the method.

Silicon Valley luminaries have defined the objective and method explicitly. Paul Graham, founder and former leader of the venerable accelerator Y Combinator, famously defined a startup as “a company designed to grow fast.”¹² He likens its mission to that of a mosquito: “A bear can absorb a hit and a crab is armored against one, but a mosquito is designed for one thing: to score. No energy is wasted on defense . . . Startups, like mosquitos, tend to be an all-or-nothing proposition”—one of growth.¹³

Reid Hoffman and Chris Yeh embody this approach fully in their hit book on Silicon Valley startup best practice, Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies. Derived from the German word blitzkrieg, “blitzscaling is prioritizing speed over efficiency in the face of uncertainty.”¹⁴ Where blitzscaling is used, growth trumps sustainable unit economics (the associated revenue and costs for a business model, expressed on a per-unit basis) and profitability.

But for many startups operating in ecosystems where capital is less readily available and shocks are frequent, a growth-only mindset is not only impractical but also unjustifiable. Frontier Innovators are pioneering an alternative model.

At the Frontier, the Camel Survives

The growth-at-all-cost model simply does not translate to the realities of the Frontier. Instead of the unicorn, then, I propose the camel as the more appropriate mascot. Camels live in and adapt to multiple climates. They can survive without food or water for months. Their humps, primarily composed of fat, protect them from the desert’s scorching heat. When they do find water, they can rehydrate faster than any other animal.¹⁵ Camels are not imaginary creatures living in fictitious lands. They are resilient and can survive in the harshest places on earth.

In this chapter, I explain how Camels prioritize sustainability, and thus survival, from the get-go by balancing growth and cash flow. But first, it is important to understand Silicon Valley’s perspective on how startups succeed.

Scaling through the Valley of Death

Startups are not companies. In the early days, they are developing a new product or service and don’t yet have customers. Therefore, startups spend more money than they earn. Eventually, they begin to sell to customers. For some startups, this process takes a few months. For others, such as Magic Leap, which raised $1.9 billion over eight years before ever releasing a product, it can take years.¹⁶

Even after startups are successfully selling products to customers and are generating revenue, they continue to lose money. Fixed costs may be large, given the investment required to build technological infrastructure—the same investment whether there is one customer or thousands. Therefore, sales are too small at first to cover operating costs. Compounding this, startups are spending capital to attract new customers (often taking a few months to start generating revenue).

The classic “valley of death” model, pictured in figure 3-1, describes this phenomenon. Startups might have a good business model but have negative cash flow until they hit sufficient sales volume to support their operations. This is the irony of the valley of death; the company could be performing well, but it still requires capital to get out of the valley and to survive until it reaches profitability.

What distinguishes Silicon Valley’s approach to building startups is its prioritization of growth over profitability. This deepens the valley of death into a chasm, heightening the absolute need for venture funding for survival—and ensuring an increasingly binary outcome of either massive success or oblivion for the company. Figure 3-2 explains it succinctly.

Silicon Valley startups raise and invest huge amounts of capital (the curve at the bottom that dips very deep) to invest in growth, often subsidizing costs to drive usage. The hope is that the revenue line will shift upward and increase exponentially, mimicking a shape my fellow Canadians know intimately: a hockey stick.

As revenue scales, and assuming costs don’t scale commensurately, profitability eventually sneaks past zero (the bottom of the cash curve) and grows rapidly beyond. This strategy works well for startups that successfully make it through to the other side: if rapid user growth takes off, they can indeed become very large, very fast.

To succeed in this construct relies on a relentless pursuit of growth. It is in some ways the forced march of Silicon Valley. Investment rounds are called Series A, B, C, and so on, sequentially taking on the next letter for the next stage in a company’s growth.

As companies progress on growth, their capital needs (to fund the bottom of the curve) become even more dire. Funding rounds thus become ever larger. However, their capacity to raise future investment is predicated on ever-accelerating revenue and the promise of future profitability. If things continue as planned, valuations and companies continue to grow. But profits don’t necessarily follow. Companies like Lyft and Uber have recently gone public. Neither is anywhere near profitability. In the first quarter after its IPO and after ten years in operation, Uber lost $1 billion.¹⁷

If growth is the objective, then venture capital is both its talisman and its servant. When companies raise venture capital, they turbocharge their growth. As First Round Capital’s Josh Kopelman once explained, “I sell jet fuel.”¹⁸

Venture capital can also be addictive. If companies get used to running on jet fuel, it becomes harder to switch to diesel. When a startup accelerates growth, it needs to hire people, invest in new infrastructure, expand offices, and spend more on marketing—all before new revenue materializes. The bottom curve, the valley of death, gets pushed ever deeper. If, at that point, the company wants to stop raising capital, it can’t. Even though it has growing revenue, it will not be profitable. It will fail unless it stays on the venture capital merry-go-round and raises more capital.

Because growth is a key metric that determines a venture capitalist’s enthusiasm, entrepreneurs in Silicon Valley are incentivized, once they’ve started using jet fuel, to spend even more aggressively. This practice both deepens the cash curve (bottom curve) and accelerates the revenue hockey stick.

Hopefully, the startup comes out the other side. If it does, it will be on the road to success, and possibly even become a unicorn. Unicorn founders are rewarded not only with riches but also with fame, adulation, and nearly guaranteed funding for their next venture. The same is true for venture capitalists. Because each individual investment is extremely high risk, venture capitalists look for opportunities that may individually provide outsized returns. A measly return of two times the investment doesn’t move the needle when half of a portfolio’s bets lose everything.

What’s more, successes become notches on an investor’s belt. The best venture capitalists are enshrined on the Midas List, the industry’s ranking of top professionals (though perhaps the organizers forgot how that particular myth ends).¹⁹ Employees are equally motivated by growth. Typically, employees are rewarded with stock options—a right to purchase stock for a particular price. These are valuable only if the company’s value increases. They can be very valuable. When Facebook went public, it minted more than a thousand millionaires.²⁰ In Twitter’s case, it was more than fifteen hundred.²¹

Yet, if success in Silicon Valley means rapid growth, then failing to hit these aggressive growth targets is considered failure. If no significant progress is made after an investment round and the traditional eighteen-month cash window it provides, startups will go for “extensions” or “bridge rounds”—code words for underachievement—to buy more time to hit the right milestones. Investor enthusiasm wanes, and future investment rounds are priced below previous rounds—something that heavily dilutes founders’ and managers’ shareholding and decreases their incentive to stay with the company. Ultimately, if a company continues to underperform—which in this case might still mean growth that most companies would be excited about, but more modest than the 100 percent or 200 percent increase projections on which the entrepreneurs raised capital—it will go under.

McKinsey & Company, the global consultancy, examined the life cycles of more than three thousand Silicon Valley–style software companies. Its report explains this Silicon Valley dynamic succinctly: “If a health-care company grew at 20 percent annually, its managers and investors would be happy. If a startup grows at that rate, it has a 92 percent chance of ceasing to exist within a few years.”²²

In a recent article about the downside of venture capital for startups, the New York Times put it this way:

For every unicorn, there are countless other start-ups that grew too fast, burned through investors’ money and died—possibly unnecessarily. Start-up business plans are designed for the rosiest possible outcome, and the money intensifies both successes and failures. Social media is littered with tales of companies that withered under the pressure of hypergrowth, were crushed by so-called “toxic V.C.s” or were forced to raise too much venture capital—something known as the “foie gras effect.”²³

Signing up for Silicon Valley’s unicorn-hunting strategy is a bit like mortgaging your home to buy three new homes. If things go well and the market moves in the right direction, then the rewards are massive. Facebook’s eye-watering returns for investors are a case in point. Yet this approach also increases the likelihood of losing everything.

In Silicon Valley, this is the strategy par excellence. The burn rate (an apt reference to the amount of cash that startups spend every month before profitability) at startups in Silicon Valley is the highest it has been since 1999. More people are working for money-losing companies now than in the past fifteen years. Attitudes seem to be changing as well. As the Wall Street Journal reports, “In ’01 or ’09, you just wouldn’t go take a job at a company that’s burning $4 million a month. Today everyone does it without thinking.”²⁴

Frontier Innovators remind us that a different model exists. While they still pursue and achieve rapid growth, Frontier Innovators balance it with other objectives.

Alone on an Island at the Frontier

Silicon Valley has an entire system to create and support unicorns. At the Frontier, things could not be more different.

Entrepreneurs are often alone on an island.

First and foremost, there is less capital. Brazil, which enjoys one of the larger startup ecosystems in emerging markets, received $575 million in venture investment capital in 2017.²⁵ To put that into context, it’s a mere $2.75 per capita, versus Silicon Valley’s whopping $1,809 per capita.²⁶

Lack of capital is a problem not only for emerging markets. In the United States, the 60 percent of startup investments outside the West Coast received only 40 percent of the capital.²⁷ Regions like the Midwest and the South receive much less capital per capita. For example, in 2016, Chicago and Austin received $443 million and $583 million in capital, respectively, versus San Francisco’s $6 billion.²⁸

Fundraising timelines are also longer. Competitive Silicon Valley deals move from first meeting to term sheet (contract with venture capital firm to invest) in a matter of weeks, and to investment closure (after review of legal documents) in a couple of months. Rounds tend to follow a natural cadence, every twelve to eighteen months, as companies progress from Series A to Series D.²⁹ In emerging markets, most rounds take months to get to a term sheet and longer still to close—a reflection of the global nature of the businesses and the investors, and often a lack of urgency given a lack of competition for the deals.

This system leads to a perpetual cycle of fundraising. The dearth of capital at the Frontier means rounds are smaller and more frequent, and thus companies are regularly undercapitalized, something that leads to having to fundraise again sooner.³⁰ Research from Endeavor, a global entrepreneurship-focused nonprofit, indicates that among emerging-market entrepreneurs in its network, 69 percent had spent more than six months fundraising in the past year.³¹

At the same time, the cost of failure for founders is considerably greater at the Frontier. Starting a business in an emerging ecosystem tends to require an assumption of great personal risk. It can take many years for a company to gain access to venture capital funding, and, in the meantime, salaries don’t come in and fees pile up. In many markets, debts are not forgiven in bankruptcy and can follow you for the rest of your life. In other places, bankruptcy can even be illegal.³²

Unlike Silicon Valley, there is a limited safety net for founders at the Frontier. If things don’t go well, the company likely won’t get absorbed by a larger player; that’s because the culture of “acquihires” (acquiring a company only for its team, giving founders a face-saving exit and an attractive stock option package in the new host company) is much less prevalent. Failing often means really failing—firing all the employees, killing the product, and going bankrupt. In many markets, failure can be a lifelong black mark on careers. As the New York Times once wrote about Europe’s entrepreneurial ecosystem, “Failure is regarded as a personal tragedy.”³³ Failure is much more financially and personally painful at the Frontier. Accordingly, it is not flaunted as a battle scar, but hidden as a blemish.

Unsurprisingly, Frontier Innovators have developed an alternative model.

Camels of the Midwest

Mike Evans and Matt Maloney founded Grubhub in Chicago in 2004. Their vision was to enable small restaurants to offer food delivery. Grubhub focused on sustainability from the get-go. It charges restaurants commissions for every sale it makes, and customers pay a delivery fee. Mike and Matt focused on scaling transactions, but doing so while keeping revenues above their costs (particularly payroll, the largest and most fixed cost). As Mike says, “The company focused on revenue and cash flow from day one, prioritizing these over growth-centric vanity metrics like the number of users or employees.”³⁴

Grubhub raised what Silicon Valley might consider comparatively meager amounts. Its Series A round was $1.1 million, three years after starting (now the average Silicon Valley Series A among top firms exceeds $15 million).³⁵ This round was followed by a Series B in 2009 of $2 million, and a Series C of $11 million in 2010. In total, the company raised $84 million in venture capital (eclipsed by Silicon Valley competitors like DoorDash, which has raised $1.4 billion).³⁶

Despite the relatively small amounts of capital raised, Grubhub was profitable at every fundraise. Grubhub launched with no outside investment and bootstrapped for the first few years, managing to break even through that time. It raised each round for a specific purpose. For example, its $11 million Series C was to expand to three specific cities.³⁷ But Mike and Matt did this only after they had created a playbook for the team to follow and achieve unit economics.

In 2014, the company went public on the Nasdaq. In 2018, Grubhub made more than $1 billion in revenue from 14.5 million active users and eighty thousand restaurants in seventeen hundred cities in the United States.³⁸ Its current market capitalization exceeds $6 billion.³⁹

The Frontier Ditches of Death

As Mike and Matt can attest, Frontier Innovators don’t avoid growth. Of course not. They are trying to scale a business, after all. Many of these innovators enjoy network effects and enviable rates of growth. However, their scaling trajectory may not have the same perfect exponential hockey-stick curve to which Silicon Valley startups aspire.

Instead, Frontier Innovators focus on sustainable growth from day one. The cash curve does not dip as deeply. Figure 3-3 shows the dynamic.

With a balanced growth strategy, Frontier Innovators can grow in controlled spurts, choosing to accelerate and invest in growth (thus accelerating revenue and cash spend) when the opportunity calls for it. Grubhub’s revenue curve had multiple waves, each signifying a mini-growth sprint.⁴⁰ Figure 3–4 shows the dynamic.

Growth is achieved in manageable increments, and profitability is either reached again in short order or is within reach if necessary. Consequently, instead of facing a single, large, unsurpassable valley of death, many Camels cross something more akin to a few shallow ditches of death. The curves may not necessarily look as rhythmic as in figure 3-3, and the magnitudes of the dips will vary, deepening for example if a Frontier Innovator raises incremental capital for a particular opportunity. The key distinction here is that Camels preserve the option to modulate growth and head back to a sustainable business if needed.

As Monica Brand Engel, the co-founder of Quona Capital, a leading emerging market investment firm, once quipped to me about this strategy, “breakeven is the new black.”⁴¹ This not only is a smart strategy in places with scarce venture capital, but also it can mean the difference between survival and failure in the event of a severe shock (such as the effect of Zambia’s currency free fall on Zoona’s revenues).

Silicon Valley would argue that this approach leads to linear rather than exponential growth, yielding lower returns than an all-out blitzkrieg of growth.

Counterintuitively, however, this is not the case. A study by PitchBook Data demonstrates that venture capital returns in the US Midwest are among the best in the country. Remarkably, among successful exits, nearly half (45 percent) of Chicago investments have provided a multiple on invested capital (MOIC; the capital returned relative to the original investment) of 10x, compared with only 25 percent in the Bay Area. From 2006, the average MOIC was 5.6x for Chicago, outpacing the Bay Area’s 4.2x by a significant amount.⁴²

In tandem, failure rates at the Frontier tend to be lower. Silicon Valley is quick to say that 90 percent of startups fail.⁴³ But research from All-World Network, an organization co-founded by Harvard Business School professor Michael Porter, determined that entrepreneurs in emerging markets have an increased survival rate.⁴⁴ Troy Henikoff, co-founder of Chicago-based SurePayroll (a leading US internet payroll player) and now a venture capitalist with MATH Venture Partners (which invests in Chicago), says this of his portfolio: “For a portfolio of sixteen companies, you would expect that after three years we’d already have a number of failures. However, we have so far had none. Like many companies in the Midwest, our portfolio has had much stronger survivorship.”⁴⁵ Anecdotally, the same is true of my own investment portfolio in emerging markets.

These impressive outcomes are the result of a concerted strategy that balances growth with sustainability and resilience. To accomplish this, Frontier Innovators manage costs, charge for the value they create from the get-go, ingest capital on their terms, understand the levers for action, diversify the business plan, and take a long-term outlook.

Manage Costs

Frontier Innovators manage costs through the life cycle of their companies. Like Grubhub, they manage the cost curve to better sync with the growth curve. New hires need to be justified by increases in revenue and operations. Investments in marketing need to be scaled at an appropriate pace. Spending levels are modulated so that the business doesn’t go too far down the cost curve hole. As Jason Fried, founder of Basecamp, another successful Chicago-based company, explains, “As a technology startup, there are few excuses to not be profitable as a startup. A big part of this is managing your cost structure. Yet managing costs is not something you hear enough about [in Silicon Valley]. If you are not managing costs [and investing only in growth], you’re not building a business. You are building a financial instrument, which is not healthy.”⁴⁶

It also helps that Frontier Innovators often enjoy an important cost advantage. For startups, the largest cost is people, particularly in the early days. In San Francisco, the cost of living has been skyrocketing, and so have wages (at least for technology workers). The current cost of hiring a software developer in Silicon Valley is double Toronto’s average salary, seven times São Paulo’s, and eight times Nairobi’s.⁴⁷ Of course, it is not only wages, but also rent and other operational costs, that are much cheaper in these latter cities.

The combination of leveraging this cost advantage and managing spending levels means that even when innovators face smaller rounds, the capital can go further. A lower-cost base decreases the depth of the cash curve. This means that for a similar investment, a startup in a lower-cost area has a longer runway (time to operate before running out of cash). This gives them more time to grow revenues and build sustainability, and it increases their resilience to shocks.

There Is No Free Lunch

Entrepreneurs working in tougher, less-developed markets don’t share Silicon Valley’s obsession with offering free or subsidized products in service of growth. They charge their customers for their products.

In Silicon Valley entrepreneurs are willing to subsidize their product. Vanity Fair explains it this way:

Start-ups offer free credit to lure in new users who might not be drawn to the service or even know about it otherwise. They can afford to subsidize these services through the influx of venture-capital funding they’ve received. And because an increase in users is often proof enough that their concept is working—whether or not new users stick around—these start-ups can go back to investors and raise more money, continuing the cycle until their funding dries up or they find a way to cut their reliance on subsidizing customer acquisition.⁴⁸

Yet this approach can backfire. For example, on-demand food startups that deliver prepackaged meal ingredients have faced challenges in converting new users they enticed with free products into becoming recurring subscribers.⁴⁹ Similarly, in the ride-hailing industry, venture capital funding has been accused of saturating the market, supporting copycat businesses, and leading consumers to default to the cheapest options in a rapidly commoditized market.⁵⁰ Many behavioral economists have further documented enduring problems with subsidized or free products: users don’t appropriately value the product, and later it is hard to switch them to paying for what they formerly got for free.⁵¹

At the Frontier, innovators charge for the value they offer from the start. Grubhub’s Mike Evans explains the dynamic succinctly: “I am building a business, not a hobby. Businesses make revenues, and hobbies don’t.”⁵²

Frontier Innovators understand that a product’s price is not a barrier to adoption but rather one of its features, reflecting its quality and positioning in the market. In emerging markets, incumbent solutions are either nonexistent or so dysfunctional that customers are willing to pay—often even a premium—for reliable, safe, and efficient products. Despite lower incomes, customers are not looking for free products. They are looking for something that responds to their needs, treats them with dignity, and, most of all, that works. Zoona advertises its product as “Easy Quick Safe,” and not “Free” or “Cheap.”⁵³ After all, it is running a money transfer business for people who don’t have a lot of money. To draw customers, innovators have to offer a solution worth paying for, and they will be rewarded if they do.

Ingest Less Capital, and Control the Timing

A Frontier Innovator’s approach to balancing growth with sustainability affords them many options over Silicon Valley–style startups. The depth of the bottom curve—the cash flow hole—is not nearly as deep. Therefore, Frontier Innovators reduce their reliance on venture capital.

Taking less venture capital can be better for every type of entrepreneur. When raising capital, entrepreneurs sell parts of their companies. Hopefully, through growth, the valuation will rise, increasing the total value of the pie. Because Camels sell less of their companies to investors, founders have a larger share of the pie at exit, along with greater control of the business throughout.

Take the case of Qualtrics. The company was founded in 2002 by Ryan Smith, Scott Smith, Jared Smith, and Stuart Orgill in Provo, Utah, as an online research company. Initially, its aim was to help schools and companies gather feedback from their students and customers through effective online surveys. The company was run out of the family’s basement for a few years. To fund growth, the founders used the company’s profits. While many venture capitalists approached them, they declined investments as the company scaled. They did eventually raise venture capital a decade later in 2012, but they did it on their terms, when they didn’t need it. By then, Qualtrics was already a multibillion-dollar company.⁵⁴

Today, Qualtrics has operations in twelve countries and serves more than eleven thousand customers (including 75 percent of Fortune 100 companies). In November 2018, Qualtrics was acquired by SAP for $8 billion.⁵⁵ The founders still owned the majority of the company at exit.

Building successful startups without venture capital is rare but not unprecedented. Qualtrics is certainly in good company. Companies like Atlassian, Mailchimp, and RXBAR all scaled in a similar way. Interestingly, they were all built outside Silicon Valley—in Australia, Atlanta, and Chicago, respectively.

Some Frontier Innovators manage their capital needs by modulating growth. Basecamp has taken an extreme approach to both. By all standards, the Chicago-based company is a success; it has been growing for twenty years, has millions of software developer users, and earns millions of dollars in revenue. It has done this without raising capital. Part of its approach is to manage growth: if a product requires more than the target maximum employee count of fifty people, the company shutters the product, even if it is successful, to stay small.⁵⁶ David Heinemeier Hansson, co-founder of Basecamp and creator of Ruby on Rails, noted, “Why is growth inevitable? It won’t guarantee longevity, and it doesn’t promise profits. And aren’t those the two main, economic concerns of a business? To be ongoing and to make money? When I look at [Basecamp] I can easily satisfy those basic, economic demands: We’re still here, and we’re still making plenty of money.”⁵⁷

Of course, this is not meant to suggest entrepreneurs should avoid venture capital (full disclosure: I am a venture capitalist). Indeed, the vast majority of Camels depend on outside investment. However, Camels are afforded the luxury of choosing whether, from whom, and on what terms to raise venture capital (or other types of capital). Like Mailchimp or Basecamp, they can choose not to raise venture capital. Or like Qualtrics or Atlassian, they can choose to raise money for a particular purpose or at a particular point. In chapter 10, you will discover how venture capitalists are also rethinking the model and adapting it to better suit the needs of innovators.

Understand the Levers for Action

At the Frontier, existential threats could come at any time and from anywhere. The Zambian kwacha crash was one such existential threat for Zoona.

Frontier Innovators are intimately aware of these risks, and so they make sure to prepare as much as possible. They understand the necessary levers for action and ways to react in times of crisis. In Zoona’s case, Keith Davies had overinvested in a detailed financial model that forecast many economic drivers on the vibrancy of Zoona’s booths, as well as the resulting cash needs of the business under multiple scenarios. As Keith explains it, “We were able to understand with confidence and show our investors and partners a range of potential outcomes, and how our business would fare in each.”⁵⁸

When the crisis hit, Zoona acted fast. It assessed the impact of the massive devaluation on the business and then called investors and made a plan of action—including rightsizing the company, slowing booth investment, and modulating various cost lines. As a stopgap, the company received a small capital injection and actively tracked the evolving situation.⁵⁹

This approach helped Zoona survive the currency crisis. However, it was by no means the company’s last challenge.

Don’t Put All of Your Eggs in One Basket

In financial planning, we are taught to not put all our eggs in one basket, but rather to diversify assets and geographies. Yet entrepreneurs are hyper-concentrated, often with their life savings and livelihoods entirely intertwined with their ventures. In Silicon Valley, startups operate like mosquitoes, having a singular focus. Frontier Innovators often take a more financially sane strategy—reflective of the complexities of their ecosystems—by building diversification in to their geography and product mix.

Take the case of Frontier Car Group (FCG), a leading used-car marketplace in emerging markets. As co-founder Sujay Tyle says, “We spread our risk across the world. We narrowed it originally to five markets (Mexico, Nigeria, Turkey, Pakistan, and Indonesia), which will serve as regional hubs. If they work, we will expand. If they don’t, we have a portfolio.”⁶⁰

Some markets, such as Turkey, struggled. Others, such as Nigeria, faced currency crises. Accordingly, FCG toggled the level of investment by geography. In Nigeria, the company limited exposure until the currency stabilized, and in Turkey it shut the operation down. It also doubled down on what was working. Its strongest geography was Mexico, and from that launching pad, it has now entered four markets in Latin America. As of summer 2018, FCG’s transactional platform had sold fifty thousand cars and had expanded to eight markets.⁶¹ So far, FCG has raised nearly $170 million, including a Series C in May 2018 led by Naspers.⁶²

Similarly, VisionSpring, a global social enterprise that offers eyeglasses to the poor, built diversity in to its business and market mix. VisionSpring has three business lines: sales to wholesalers, sales through intermediaries, and direct sales (in partnership with local nonprofits for distribution). It is active in six markets. This effectively means that there are eighteen businesses, each at a different level of maturity and scale. The more-mature ones support the others.⁶³

These approaches are synergistic with other themes covered in this book. In chapter 2 you learned how Frontier Innovators can operate a horizontal stack, offering multiple, self-reinforcing product lines, and in chapter 5 you will explore how Frontier Innovators operate in multiple markets. As you will see, these strategies are proactive approaches to growth and often necessarily reflect the nascent ecosystems in which Frontier Innovators operate. They are also implicit diversification strategies.

There is evidence that the diversification strategy is effective in building resilience in emerging markets. Research published in Harvard Business Review explains that “highly diversified business groups can be particularly well suited to the institutional context in most developing countries. [They] can add value by imitating the functions of several institutions that are present only in advanced economies. Successful groups effectively mediate between their member companies and the rest of the economy.”⁶⁴ In markets where there is less judicial redress for customers who are wronged, a trusted brand helps. After building a successful reputation on the back of one market segment, multiline businesses leverage this trust elsewhere.

Similarly, in markets with limited capital markets, diversified players cross-fund businesses to support high-potential ventures. In markets with limited training, multiline businesses can keep their best talent and offer them valuable experience across the organization. Relatedly, this strategy also helps innovators mitigate labor market inflexibility (e.g., it’s hard to fire people when business needs change) by letting them rebalance human capital across a broader range of activities.⁶⁵

Although the study was particularly concerned with large, diversified groups—such as the chaebols of Korea, grupos of Latin America, or business houses of India—the logic is the same for Frontier Innovators. In especially challenging operating environments, companies having multiple business lines fill institutional voids. As you saw in chapter 2, the approach of building multiple businesses is often not a choice but a necessity given the lack of local infrastructure.

Yet the portfolio approach can go too far. One of the reasons Silicon Valley advises against this strategy for startups is that building fast-growing startups is extremely difficult and requires a massive amount of effort and dedication. It often requires the metaphorical 110 percent focus. As any founder will tell you, building one startup is demanding enough. Being spread too thin across multiple projects is a recipe for mediocrity in each. At its extreme, this dynamic presents itself in certain developing ecosystems as a phenomenon called portfolio entrepreneurship, whereby entrepreneurs start a series of unrelated subscale businesses. This practice, often a result of a fear of failure (rather than a clear-eyed resilience strategy), manifests itself when entrepreneurs hedge their bets to save face if any one business fails. Yet it also leads to low likelihood of big success in any one business.⁶⁶

Therefore, the lesson should not be about building diversification for its own sake or in an ad hoc manner. Rather, it is about building a portfolio strategically, and when necessary. A portfolio of activities can be both self-reinforcing and self-balancing. Self-reinforcing means that success and learning from one area (say, an emerging best practice for Frontier Car Group to manage fraud) supports the rest of the business. Self-balancing allows for managing risk if any of the segments are not working or are facing particular risks, without threatening the whole (in Zoona’s case, the currency crisis was particularly challenging because the company had only just begun to scale outside Zambia).

Of course, this strategy is primarily to counter extremely challenging ecosystems. It is often more operationally complex and resource intensive. Therefore, in comparatively stable markets, such as those in the United States, a more concentrated strategy may be advisable.

Take a Long-Term View

Frontier Innovators focus on sustainability over growth-at-all-costs. Consequently, they take a longer view of success.

Analysis of startups in Asia, Africa, and Latin America suggests that the average time to exit is more than thirteen years, and exit times can drag on far beyond that.⁶⁷ That’s about double the exit times in Silicon Valley, where average time to exit is six to eight years (although unicorns are now tending to stay private longer in Silicon Valley).⁶⁸

Ryan Smith of Qualtrics explains: “This is not a five-year game. It is a twenty-year game. In the early days, we had a good business, but our big breakthrough came in years thirteen through seventeen when we switched to enterprise.” For Smith, giving new initiatives time to mature was critical: “Every successful bet we made looked terrible when we started. Everything took longer than we expected. The ability to wait and the flexibility to stick with it was crucial.”⁶⁹

This dynamic is particularly true in emerging markets. When advising founders operating in developing markets, I suggest survival as the number 1 strategy. This gives you time to evolve the business model, find a product that resonates with customers, and develop a machine that can deliver at scale. There may be competition. The race is not always about who gets to market first. It is about who survives the longest. Achmad Zaky, co-founder and CEO of Bukalapak, an Indonesian startup valued at $1 billion, boiled this approach down (and added an animal to our menagerie) when he quipped, “We are like cockroaches. They don’t shy away from eating anything. They can outlive a nuclear blast. They just survive.”⁷⁰

A longer-term outlook decreases the trade-off between growth and risk and allows for resilience. As Mike Evans notes, “It took us ten years to IPO. We could have shrunk that to eight by prioritizing growth over profitability. But we would have increased risk by seven times. We chose sustainability.”⁷¹ Grubhub took longer than it otherwise could have to get to an exit but did so with higher resilience; the company was able to absorb risks and challenges along the way.

Supposedly, Albert Einstein once said, “Compound interest is the most powerful force in the universe.” A long-term view gives Frontier Innovators the opportunity to grow their ideas to maturity and reap the compound benefits of that growth.

Why It Matters

News headlines lead us to believe that venture capital is plentiful and only looking for a home. Just look at SoftBank’s eye-popping $100 billion Vision Fund. It would appear that the unicorn-chasing strategy is unstoppable, at least for now.

But that misses the point.

Compared with Silicon Valley–style startups, Frontier Innovators operate in more challenging ecosystems, with far fewer resources available, much greater risk of experiencing external shocks, and much greater downside in case of failure. Their business models reflect these realities.

Despite Frontier Innovators’ best efforts and use of every trick in the book, these challenges remain existential threats for even the best companies. After successfully weathering the Zambian currency crisis, Zoona diversified into new markets and experienced a period of growth. Recently, however, a sudden and seismic shift in the competitive landscape upended its unit economic assumptions, forcing it to adjust its business plan and seek a new round of venture capital from skittish investors wary of the markets in which Zoona operates. As it did in 2015, it is tapping in to its inner Camel and navigating these new challenges—another round in the endless boxing match for survival at the Frontier.

But Zoona’s story is not unique to the Frontier. Some areas in Silicon Valley also face an uphill battle raising capital, especially if their business models do not fit the standard mold; for instance, the cleantech industry remains a black sheep.⁷² We know, of course, that the good times never last and that the US economy is also susceptible to shocks.

Certain pockets of Silicon Valley are catching on. A movement called Zebras Unite (yes, another alternative animal name for startups that are not unicorns) is focused on raising awareness for the range of startups for which the Silicon Valley unicorn-chasing growth strategy is not appropriate. The movement now has more than forty chapters and fifteen hundred members around the world.⁷³

Indeed, it seems that building sustainable and resilient businesses is a good idea for entrepreneurs of all stripes and humps.