POSTMODERN CAPITALI$M
The secret to success for a unicorn: simple technologies and private funding at an early stage
A new international study led by Kaunas University of Technology, Lithuania reveals that digital mental health start-ups reaching unicorn status tend to secure private funding early, prioritise simple, scalable services, and use subscription models.
Kaunas University of Technology
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Prof. Asta Pundzienė, Head of the Digital Healthcare Innovation Research Group at KTU
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A new study by researchers from Kaunas University of Technology in Lithuania and their partners reveals that digital mental health platform start-ups that have become unicorns often received funding in the early stages, developed necessary services rather than advanced technologies, and used subscriptions as a revenue model. However, according to the researchers, state funding can have the opposite effect, hindering a start-up’s development rather than encouraging it to become a unicorn.
In venture capital terminology, a “unicorn” is a start-up company valued at over 1 billion US dollars. Digital platforms have the potential to become unicorns more quickly than other types of ventures due to their business model. However, according to Asta Pundzienė, a professor at the School of Economics and Business at KTU, fewer than 10% of digital service start-ups achieve such exceptional success.
“In Lithuania and Europe in general, investors tend to prioritise start-ups that develop deep tech,” says Pundzienė, Head of the Digital Healthcare Innovation Research Group at KTU. “However, our research has shown that not only deep tech companies, but also those developing simpler technologies (known as shallow tech) can also achieve exceptional success.”
According to her, the results of the KTU study provide grounds for considering more targeted funding criteria for start-ups, and the insights could be useful for all digital service developers, not only in the health sector.
Success is determined by a combination of factors
A team of researchers from KTU School of Economics and Business, together with colleagues from universities in France and Spain, examined 125 mental health platform ventures, including 12 unicorns, to identify the success factors. According to the researchers, the demand for digital platforms offering mental health services the number of such solutions has grown significantly in the post-COVID period.
“While researching the digital health technologies field, we were intrigued – as to why so often, the ventures which are developing health services, essential for people, are unsuccessful. This question led to another: What are the successful ventures doing differently? The mental health platform sector was chosen as it provided us a sufficiently broad sample for investigating these questions,” says Rima Sermontytė-Baniulė, one of the co-authors of the study.
Summarising the results of the study, Sermontytė-Baniulė states that exceptional success is not determined by a single factor, but by their combination and complementary solutions. After analysing the digital mental health platform unicorns, the team of researchers identified several potentially successful combinations of managerial choices.
“Our research shows that obtaining funding at an early stage of business development is one of the key factors for success. Successful business decisions include the development of deep technologies in the business-to-business segment, not opting for state funding, and the development of services based on shallow tech in the business-to-customer segment, as well as choosing a subscription as a revenue model,” explains the KTU researcher.
According to Prof. Pundzienė, although the study focuses on digital health services, its results could be applied in other similar areas, such as education. The subscription revenue model is also used by digital service companies in other sectors, such as media, finance and information technology.
State funding turns out to be a double-edged sword
One of the most interesting findings of the study is the insight that government funding does not help and, in many cases, even hinders a venture from achieving a unicorn status.
“Governmental institutions that manage venture funds often have different objectives than private investors. For example, the state-managed institutions often pursue social goals, such as employing more researchers, set very high standards for scientific research, and prioritise the development of advanced technologies,” says Pundzienė.
According to her, these goals do not necessarily coincide with the principles of rapid business development. Sermontytė-Baniulė adds that accountability for state funding is based on formal criteria set by state institutions. The state-funded ventures need to focus on meeting these criteria, which are often not compatible with business logic.
Although the study conducted by the KTU Digital Healthcare Innovation Research Group was global in scope, the vast majority of the 125 mental health platforms analysed and all 12 unicorns were based in the US. According to Prof. Pundzienė, these results are not surprising, as 6 of the 10 most valuable unicorns in the world are from the United States.
“The innovation ecosystem in the US is highly developed, with a huge network of private investors. Private businesses invest rationally, funding the ventures that bring value to customers, that develop services customers are willing to pay for. Often, these ventures develop deep tech only when the company is already up and running. Of course, deep tech can provide a competitive advantage in an innovation-saturated market,” says Pundzienė.
According to her, when a start-up is forced to survive from grant to grant and in the innovation ecosystem, there are few private investors, the pace of innovation slows down.
Call to investors: Focus on market needs rather than deep tech
KTU researchers are convinced that the criteria used by the European investment funds should be reviewed. According to Pundzienė, similar issues were highlighted in the Draghi report, recently published by the European Commission.
“Europe is asking why, having an exceptionally high level of fundamental research, we are slower to bring innovations to market than the United States or China. On one hand, Europe has a different social structure, a different work ethic, and different market regulations – that is understandable and perfectly fine. On the other hand, when introducing innovations to the market, Americans first look at what consumers and businesses need, rather than prioritising the scientific novelty of a venture. We could learn from this,” says Prof. Pundzienė.
She believes that when financing ventures, especially those creating innovations in such an important field as healthcare, priority should be given not to how much the idea meets the criteria for evaluating scientific innovation activities set out in the Frascati Manual (2015), but to how relevant the technological service is, i.e. what benefits it brings to the user.
“In Lithuania, we already have e-health, which allows health data to be collected and shared nationwide. However, there are many digital health services that are underdeveloped, such as telehealth, digital therapy, clinical decision support, health service management systems and others. If such services do not exist, then this is an innovation that is worth supporting,” says Pundzienė.
The KTU researchers point out that, according to their research, early-stage funding is a particularly important factor in a venture becoming a unicorn. Therefore, they urge the expansion of the state funding model to include more criteria, such as assessing the benefits a company creates for consumers, the stage of development of the start-up, and the growth needs that the financial injection will serve.
“First, we should see whether the venture meets market demand and, if so, support it to develop its innovation. It is not necessary to start with complicated technology, especially when it requires large and long-term investments. The innovation will enable the company to generate revenue, which will allow it to further develop its innovation by implementing deep tech, which will benefit both the healthcare sector and patients,” says Pundzienė.
This paper is part of a project that has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement. Grant Number: 952012
Journal
Strategic Entrepreneurship Journal
Method of Research
Data/statistical analysis
Subject of Research
Not applicable
Article Title
What entrepreneurial decisions enable the breeding of digital platform unicorns?
