Unicorns, Risk & Antifragility

Unicorn hunting does not mean that you love risk. Nobody sensible loves risk. Risk is to be avoided if possible or managed if it is unavoidable.

I love powder snow skiing. That means that I take some risk with avalanches. I don’t love the risk of avalanches. It is simply a risk that I have to avoid or manage in order to get the pleasure of powder snow skiing.

One of my favorite business books is Nassem Taleb’s Antifragile (more insights per page than in the whole book by most writers). A Unicorn is Antifragile. If benefits from massive change. LendingClub (and other Fintech Unicorns) benefit from the credit implosion of 2008 occurring at the same time as the explosion of digitization. Almost all other businesses are harmed by massive change. Today we are in a period of greater than normal change with three tsunamis hitting at the same time – digitization, deleveraging and globalization – creating lots of Black Swan events. In this environment, Unicorns can be lower risk than “normal” businesses.

Normal businesses that do well are like cart horses. They are tough and resilient, so they can withstand the brutal knocks of massive change.

However cart horses don’t benefit from massive change, they survive massive change.

Only Unicorns benefit from massive change because they are Antifragile.

There are also “Chimps”. This is the name coined by Geoffrey Moore to those who fit into the ecosystem of a Gorilla. In other words, Chimps are built to be flipped to Unicorns. This is a perfectly valid way to create and grow capital, but totally different from growing a Unicorn. There are also the 99% of small companies that don’t get outside capital and are never designed to be big (but which in aggregate are the mainstay of the economy).

Cart horses and Chimps are good businesses. However this post is only about Unicorns.

This is how all participants in Unicorn creation manage risk:

  1. Early stage investors. They are getting low cost options on massive upside potential. With enough diversification and some good judgment to spot unicorn potential, this is not high risk. If the market potential is huge, even if the venture does not hit its full potential, some type of exit is possible because another ventures will buy the IP. More importantly, just one Unicorn invested early can make a fund returns look good even if all the other ventures fail or deliver sub par returns.
  1. Early employees. They get a salary, an upside option and a great opportunity to learn if the venture fails.
  1. Founders. They take the biggest risk, because it takes about 10 years to create a Unicorn and it is incredibly hard physically, emotionally and financially to start another Unicorn if you have spent 10 years on one that failed. The key is spotting when you made a mistake, when you thought it was a Unicorn but it was not. Then you quit and fail fast (or pivot if you have enough capital and the trust of your investors). Cart horses “gut it out”. It is all about persistence. Unicorns are about the magic of network effects and you have to be clear-eyed about whether that magic exists or not.
  1. Late stage investors. Unicorns are monopolistic (in the way that Peter Thiel describes good monopolies in Zero To One). Betting on number two is a losing proposition (e.g. Myspace vs Facebook or Lyft vs Uber). Paying ridiculous valuations for the # 1 is much better than sensible valuations for the # 2.

If you play the card game called Hearts, you get the chance to “shoot the moon”. That is a big risk trade off. If you try to shoot the moon and fail, you lose big time.


If you “play your cards right”, the risk in unicorn hunting is very low. Of course you can play your cards badly. To use that powder snow skiing analogy, you can leap down a tempting slope after a big snow fall when it has suddenly got a lot warmer. The classic mistakes for the participants in Unicorn creation are:

  1. Early stage investors. Not being adequately diversified and not having enough capital to invest in your winners.
  1. Early employees. Jumping from one failed unicorn to another while taking big pay cuts in return for equity. The opposite is equally bad, avoiding all risk by working for “safe as houses” big companies that are totally vulnerable to Black Swans.
  1. Founders. Worrying too much about dilution. Unicorns need a lot of capital, to crush the # 2 when the market gets to that stage. 10% of $1 billion is $100m, which is the same as 100% of a $100m exit for a bootstrapped cart horse.
  1. Late stage investors. Not getting out of the # 2 and into the # 1 quickly enough.

The one fundamental mistake is thinking it is a Baby Unicorn when it is not.

It is easy to recognize a fully-grown Unicorn. It is massively valuable. The harder thing is recognizing a Baby Unicorn, a business that if it is “raised properly” becomes massively valuable.

That is why I publish a 7-point check-list to see if you have a Baby Unicorn. You can make plenty of money in plenty of businesses that are not even remotely like Unicorns. The point is simply to recognize whether it is a Unicorn (or a Cart Horse or a Chimp).

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