Unicorns & doughnuts

New research suggests start-up community’s sweet tooth is bad for business.

Silicon Roundabout today welcomes a new kind of business. Alongside the lean start-ups and the occasional unicorn (a company whose valuation exceeds the fabled $1bn mark), researchers at Cambridge Judge Business School have identified another, more common kind of business, which they are dubbing ‘the doughnut’.

What do doughnuts look like? Well, as lead researcher Professor April Sweet put it: “These are businesses with a hole in the middle. They appear successful from the outside, typically characterised by plush offices and extravagant investment activity, but seriously depleted balance sheets.”

The research, How Doughnuts are Destroying the VC Sweet Tooth (to be published in the Journal of Foolhardy Economics today), suggests that up to 70 per cent of UK start-ups may well be doughnuts, with serious implications for UK growth prospects.

The research team examined more than 400 start-ups, applying a rigorous ‘taste-test’ to each one, with points awarded for ‘calorific’ behaviour. As Professor Sweet explained: “We are used to calling start-ups that reach the magical $1bn mark ‘unicorns’, but we have now also identified a large rump of organisations at the other end of the scale that look great from the outside but just don’t deliver on the inside.

“I wouldn’t say they’re all sugar and no spice, but they are certainly taking the edge off VC profits.”