How To Build A Billion Dollar Company: The Method Behind Today’s ‘Unicorn’ Madness

(This article originally appeared on Forbes.)

Billion dollar companies are being created at a faster pace than ever before, so there are plenty of opinions in the bubble or bust debate. I won’t bore you with more.

What we discuss often at the Founder Institute, however, is how these billion dollar companies are being created in our current startup growth climate.

I believe that if you look at it objectively, there is a method to the “madness” of these so-called “Unicorn” companies.

The Method

The most recent Unicorns are being developed in as little as 36 months, with the combination of strong Founders, forward-thinking investors, and aggressive teams using a cycle of three main tactics: (1) the Push, (2) the Markup, and (3) the Backfill.

1. The Push

The “Push” is a seemingly unattainable growth plan designed by the Founders of a startup looking to create immense shareholder value, or build a truly global and transformative company in the quickest amount of time possible. Whereas a bootstrapping company may aim for a growth rate of 10% per quarter, a startup pursuing a “Push” may set moonshot goals over 15% week over week growth.

I like to call these “Ludicrous-Mode Growth” plans.

To execute these plans, the company will look to hire the best talent available, secure a staggering array of users and customers, and as a whole demonstrate that they will dominate the market in a world defined by Pareto distributions and the Power Law. Often times, the plan for this “Push” will be discussed and negotiated with their investors, who then fund with the company with a massive “Markup.”

2. The Markup

Rather than fund a company on the future value of a sustainable growth plan, the “Markup” is an enormous funding round that values the startup at the future expected valuation of a company that flawlessly executes their “Ludicrous-Mode Growth” plan outlined in the “Push”.

For example, today you will see a ten person, pre-revenue company with a solid “Push” plan get offers for a pre-money valuation anywhere from $125 MM to $250 MM, raising $30 MM to $50 MM or more.

The first modern “Markup” round was done with Facebook FB -0.29% in May 2009, valuing the company at $10 billion. Do you remember how shocking that valuation was at the time?

Since then, the phenomenon has become more commonplace, and almost every surprisingly large funding round today is a version of the “Markup”.

3. The Backfill

Now is when things really start to get tricky. When the startup takes the money from a “Markup” round, they have pushed all their chips into a high-pressure game of “Ludicrous Mode”-scaling to “Backfill” the value they have pledged to create. These days, the team only has about six to twelve months to build a business worth the valuations set in the “Markup” round.

This is a lot easier said than done, of course, because scaling at “Ludicrous Mode” is only possible for the most talented and aggressive teams, in the most opportune markets. If the team is successful and is able to “Backfill” the value of the “Markup”, they then have the opportunity to create another “Push”, raise another round of funding at a huge “Markup”, and prove their worth yet again to “Backfill” that value.

The modern day Unicorn is a company that was able to successfully execute this cycle of Push -> Markup -> Backfill until hitting the billion dollar valuation in their latest “Markup”.

You’ll read more and more about these “Dead Unicorns” as time goes on, but let’s be clear: these companies are neither failures, nor worthless. These companies and their investors were simply following the “Ludicrous Mode Growth” mindset that has helped create the Ubers of the world, but the company was unable to “Backfill” the value of the “Markup” in their latest cycle.

Risks of this Method

On the investor side, “Markup” rounds now typically also involve the acquisition of stock on the secondary markets at a much lower valuation. For example, a new investor might buy 1 MM shares of stock at $100 per share from the company, and then immediately go buy another 1 MM shares from early angels, employees and others at a value of $50 per share. By employing this strategy, the blended average share price for the stock that the investor acquired is $75, providing the investor with an immediate “markup” on their overall investment.

In reality, however, this $75 blended price point may be closer to an “old school” venture valuation. Some prominent new investors are actually starting to lock in the secondary stock acquisition amounts and prices right into the term sheet, forcing the management team to secure discounted stock or risk getting nothing. This is a questionable practice, at best.

On the company side, you are starting to see the results of some corners cut in the face of extreme demands of the “Backfill”, with some prominent cases in the media recently. While I do not know whether the details of the Theranos reports are true – does anybody find the idea of a company doing anything to deliver a service that was predicated by a massive “Markup” round surprising?

You’ll be seeing more stories like this, for sure.

The Future

For some companies, the Push -> Markup -> Backfillmethod is the way to go, but for many others it is not.  One of the things we discuss with the aspiring entrepreneurs in our Founder Institute program is what their goals are, and how best to achieve them. If you aren’t looking to change the world or build a billion dollar business as quickly as possible, then avoid this strategy at all costs.

And, while there are risks and definitely abuses, you can’t deny that the method is working for many companies to create immense value at record speeds.

What’s more, Unicorns are no longer an exclusive phenomenon to Silicon Valley, or even the United States. As of 2015, less than 50% of the Unicorns were created in Silicon Valley, and only about 60% are from the United States. Major pockets of Unicorns are being created in Asia (19%), Europe (8%) and India (5%) with additional pockets in Canada (2%), Israel (2%) and even Australia (1%).

From Atlassian (Sydney) to Zenefits (San Francisco), talented Founders all over the world are working with forward-looking investors to create enormous shareholder value.