Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance

24 Pages Posted: 2 Aug 2018 Last revised: 7 Aug 2020

See all articles by Martin Kenney

Martin Kenney

University of California, Davis

John Zysman

University of California, Berkeley

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2018


This essay examines the implications of the evolving environment for the formation and financing new firms. "Unicorn" became an emblem of the newly founded firm that had rapidly grown to a value of a billion or more US dollars. However, there has been a downside, and new dilemmas, with rapidly expanding firms slipping away and like a Cheshire cat, leaving only a smile. After the dot.com crash of 2000, there was a regime change in new firm formation and the number of firms that exited through an initial public stock offering. This change was made possible by the decreased cost, increased speed, and ease of market entry due to availability of open source software, digital platforms, and cloud computing. This facilitated a proliferation of startups seeking to disrupt incumbent firms in a wide variety of business sectors. The eased market entry was accompanied by a growth in the number of private funding sources that now include crowd-funding websites, angels, accelerators, micro-venture capitalists, traditional venture capitalists, and lately even mutual, sovereign wealth, and private equity funds - all willing to advance capital to young unlisted firms. The result has been the massive growth in the number of venture capital-backed private firms termed "unicorns" that have market capitalizations of over $1 billion. The ease of new firm formation and the enormous amount of capital available has resulted in to a situation within which new firms can afford to run massive losses for long periods in an effort to dislodge incumbents or attempt to triumph over other lavishly funded startups. The result has been remarkable turmoil in many formerly stable industrial sectors, as the new entrants fueled by capital investments undercut incumbents on price. Because the new firms intending to disrupt existing firms are venture capital-finance, they can afford to operate at a loss with the goal of eventually triumphing. Existing firms competing with the disruptors must be profitable to survive, while the disruptors need only keep their investors, the ultimate result is that those firms with access to capital are likely survive and displace.

Suggested Citation

Kenney, Martin and Zysman, John, Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance (June 27, 2018). Available at SSRN: https://ssrn.com/abstract=3220780 or http://dx.doi.org/10.2139/ssrn.3220780

Martin Kenney (Contact Author)

University of California, Davis ( email )

Community and Regional Development Unit
Davis, CA 95616
United States
5305745943 (Phone)

John Zysman

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics