Group of people working at a startup.

How to better harness unicorn startups

29 May 2024

The article at a glance

Entrepreneurship needs to shift from a model that prioritises growth at all costs toward a more responsible model that controls negative consequences, argues research co-authored by Professor Matthew Grimes.

The term ‘unicorn startup’ describing new ventures valued at more than $1bn has been around only since 2013, and such unicorns have been widely idolised as progressive and positive for entrepreneurship and the broader economy. 

Research co-authored at Cambridge Judge Business School argues, however, that the startup community’s pursuit of unicorns needs to be tamed in a way that continues to champion the reformative aspects of these ventures while ensuring better governance around potential unintended consequences.  

How the negative costs of entrepreneurship are often overlooked 

Matthew Grimes.
Professor Matthew Grimes

“Our paper challenges the existing taken-for-grantedness associated with entrepreneurial disruption, its promises of reform, and its too-often overlooked negative externalities”, says the research published in the Academy of Management Review, co-authored by Jonah Zankl of the University of Queensland in Australia and Matthew Grimes of Cambridge Judge Business School. 

“While entrepreneurial disruption has proven a source of abundance by way of reforming markets and legacy institutions, it is also frequently characterised by the displacement of existing professions, industries, and livelihoods among other societal and ecological externalities”. 

The paper – “Taming unicorns: toward a new normal of responsible entrepreneurship” – calls for “guardrails” in the form of financial incentives and monitoring systems to enable a transition toward such more broadly beneficial enterprise.  The paper forms part of the journal’s Special Topic Forum on “The New Normal: Positive Organizational Impact in an Age of Disruption”. 

Venture creation should be more responsible 

“The term disruption has been used for a long time in association with innovation and reforms linked to entrepreneurial activity, and such disruption is in some cases useful”, says study co-author Matthew Grimes, Professor of Entrepreneurship and Sustainable Futures and Co-Director of the Entrepreneurship Centre at Cambridge Judge Business School.  

“Prior research has often assumed that reform and negative effects are inseparable aspects of entrepreneurial disruption, but our paper calls for a reorientation toward responsible venture creation that controls the negative aspects of disruption while focusing on the reformative aspects. 

“We also propose a model of responsible innovation governance alongside a process of systems change necessary to overcome institutional-level resistance to such a transition”, says Matthew. 

Unintended consequences result from pursuit of market opportunities

The research traces how many tech-based innovations and resulting unicorns have translated into an assumption that disruption was an inevitable consequence of the rapid commercialisation of emerging technologies and disintermediation of existing value changes. The term unicorn is based on a $1bn-plus valuation raised by private market investors or upon exit to the public market, and policymakers have largely applauded such high-profile and seemingly valuable ventures. 

Yet the paper underlines that potential and actual disruptions caused by high-growth ventures can cause both significant intended and unintended consequences to economic, societal, political and natural systems in the pursuit of new market opportunities. 

“Whereas ‘market reform’ refers to the process of improving the existing relationship between production, distribution, and consumption within a market along with associated institutions, ‘unmanaged externalities’ refers to the negative societal and ecological consequences frequently associated with limited oversight and governance of innovation”, the research says. 

Proposal of a new responsible entrepreneurship ideology 

The authors trace these unmanaged externalities to an emergent neoliberal entrepreneurship ideology (NEI) that has focused on financial return while neglecting other societal factors; such NEI, the paper says, has sometimes “been elevated almost to the degree of a religious dogma”. 

The research instead calls for a shift toward a responsible entrepreneurship ideology (REI) that manages such negative factors in order to create a new normal that marries reform with responsibility. 

“Our theory suggests that in many cases entrepreneurial disruption might be seen as both simultaneously productive and destructive, and we offer new theory for societies to embrace the former, while controlling for the latter”, the authors say. 

How finance impacts innovation: speculation and scrutinty

While entrepreneurship is old as time, the authors say that in recent decades ‘financialisation’ in the form of increasing activity by financial markets, actors and institutions has boosted entrepreneurial disruption and raised “speculation around the market valuation of innovations” that lowers scrutiny toward negative aspects of such innovation. 

The paper says that deregulation has allowed an inflow of such investment, “creating an abundance of relatively inexpensive financing for startups” that has, in turn, “led to oversized and speculative valuations for startups and their innovations—valuations, which increasingly require little to no evidence of actual value creation”. 

“The assumption here is that within the context of winner takes all dynamics, investors should continue to subsidise the costs of growth to outcompete other similar startups, thus ensuring the ability to disrupt existing markets. In this way, resources can continue to flow toward startups until markets and other systems are reshaped and thus in some settings the speculative investment of eventual entrepreneurial disruption becomes a self-fulfilling prophesy”. 

How to overcome political resistance to more responsible enterprise 

So how might society shift from NEI toward REI, especially given the political resistance that such a change will encounter? 

According to the research, market reform can proceed while potential negative effects are controlled through guardrails such as new incentives that alter “the costs and benefits of a particular line of action”, along with monitoring guardrails that “address actors’ tendency to embrace extremes” by for instance embracing venture growth while overlooking the professions or industries that may be displaced in the process. 

Guardrails, the research says, can encourage organisations to “oscillate between 2 sides of a paradox, ensuring a productive and sequential mix of strategic activities”. Thus, the study suggests it is possible for new ventures to remain focused on growth and reform while also simultaneously accounting for and attempting to control for risks to society or the natural environment which might emerge as a result. 

Such guardrails can include mechanisms such as innovation grants to ensure that the benefits of R&D-generated technologies are widely distributed among startups, and the use of government golden shares if private firms are deemed to engage in excessive rent-seeking. 

The research tackles head on whether it is “plausible that politicians and other elites would buy into, help advance, or even allow the reformation of the entrepreneurship field” – given the benefits the elite actors such as financiers and politicians enjoy from successful and high-profile unicorns. 

“We believe that not only is such a pragmatic approach to transition possible, but also that we are beginning to see early signs of that transition” as evidenced by increasing pressure from politicians and technologists to slow down the pace of development of generative artificial intelligence and large language models given many questions about the technology.