Cockroach startups > Instant unicorns
It may be hard to believe that the term ‘cockroach startups’ predates the coining of ‘unicorns’. When Y Combinator cofounder Paul Graham wrote about looking for startups that can survive a nuclear war in 2007, it was more than half a decade before venture capitalist Aileen Lee coined the term unicorn in a 2013 Techcrunch article.
If nothing else, perhaps this chronology should tell us a bit about what the priority for most startups should be. It’s not surprising though that ‘cockroach startups’ are back in vogue.
After the peak pandemic year of 2020, the year 2021 could have been on a course correction, with more focus on cockroach startups that do not blow up money and refrain from being extravagant. Instead the year saw the entry of 44 unicorns to the club in the same year, the highest so far. Not only this, despite the funding winter of 2022, the year added another 21 unicorns, skyrocketing the total unicorn count to 108 in India.
At the same time, we saw most unicorns across sectors posting heavy losses in FY22 and resorting to layoffs [now reaching 21K+] to minimise their costs in FY23. Also, as per one of Inc42’s October 2022 report, around 10 startups are in danger of being locked out of the unicorn club due to the ongoing fluctuations in the dollar-rupee exchange rate."
Why are these startups called cockroaches?
Cockroaches have the innate ability to survive in the direst of situations. According to Blacksoil’s Bansal, this instinct is derived or achieved by a startup through its ability to survive with minimal funding (largely bootstrapped), high attention to profitability (EBITDA +ve), pre-identified and a well-catered captive market, low or highly calculated cash burn, spending less on fixed assets such as an office, low CAC, and not underpricing the product (direct or in-direct), dreaming to monopolise some day.
Other imperatives to note are that cockroach startups have a natural ability to survive in any macroeconomic, regulatory and competitive environment.
How can investors spot cockroaches?
These are the 6 tell-tale signs that a startup has the potential to become a true cockroach:
1. Cut costs efficiently during a slow market - obvious, but still hard to do.
2. Manage cash frugally instead of chasing funding rounds and valuations.
3. Keep your current customers REALLY happy. As sales slow down, existing customers becomes harder; churn always hurts, but it kills right now . They check in on your customer support/success functions and don't let services detoriate.
4. Simplify the product, target market & GTM . The more you simplify, the more you can reduce spend. The more you simplify, the more you can focus. The more you focus, the easier it becomes to make hard decisions.
5. Communicate more, with everyone. Investors are updated regularly, with good and bad news. There is transparent communication with employees .
6. Launching alternative services/strategies to make up for lost $$$.
But in all this chatter about unicorns, cockroaches and every other animal under the sun, investors need to keep an eye on the "zombies".
There’s a decent amount of chatter online about “cockroach startups versus unicorn startups.” However, the unicorns are getting slaughtered, and represent a very small percentage of startups anyway. The comparison is OK, but since most startups will never be unicorns, it seems superfluous. And both cockroach and unicorn startups can be great—but zombie startups are always terrible.
So what’s the difference between a zombie startup and a cockroach startup?
Zombie startups are those that are already dead, but don’t know it. They’re shuffling along, burning cash, and likely bloated. They could live for a long time, but realistically won’t get to product-market fit (PMF).
Cockroach startups are true survivors. When things get rough, they adapt quickly, harden themselves to the brutal environment and live. Cockroaches don’t give up, but they also don’t extend themselves when circumstances are against them. Cockroach startups are led by cockroach founders—those that keep pushing, with minimal means, driving themselves to get to product-market fit and winning. It may take quite a long time to get there, but cockroach founders put themselves in a position to at least give it a real try.
It’s not fun being a cockroach founder and startup. It’s brutally difficult and survival isn’t guaranteed (yes, even cockroaches die sometimes.) But it’s often a sign of true belief, purpose and determination.
Can you name any cockroach startups? Keep an eye on them!