In this way cycles are born. Booms begat busts, and busts begat booms.

This dynamic plays itself out in all economies, and the Unicorn Economy is no different. However, in order to understand the Unicorn Economy, we need to introduce the notion of technology to our market for stuff.

The existential tension between technology and capital

At the beating heart of every great tech company is the creative tension between the conflict of interests between technology and capital.

Technology is best served when its solutions are given away at marginal cost, so they can be compounded upon by others. Think about the technologist’s passion for open-source software.

Capital is best served when it captures the maximum amount of economic benefit from its use. Think about the capitalist fervor for the creation of a monopoly.

Both forces compound and evolve, pulling the company to create and then capture value. In order to create a viable billion dollar enterprise, you need both.

In the narrative of Silicon Valley, the founding moment was a meeting between technology and capital.

Technology, in the form of a group of engineers called the ‘traitorous eight’ with a radical new plan to make computer chips out of inexpensive silicon…

…and Capital, in the form of a 1950s NY banker by the name of Arthur Rock (way before he was on the cover of Time).

The technologists were looking for a home to do their research and came upon the capitalist, who said:

Why not just make your own company?

Essentially introducing the radical capitalist notion of ‘hey, why not capture some of the value that your plan would create?’

The company they started was called Fairchild Semiconductor. Many companies sprung from Fairchild, though perhaps the most prominent to be created, with the help of none other than Arthur Rock, was called Intel.

The legacy of the traitorous eight and Arthur Rock is not only what we now know as Silicon Valley, but a set of economic and organizational structures that have defined the marriage contract between technologist and capitalist for fifty years.

Those structures seek to align incentives in ways that allow for the right balance between the creation and extraction of value, but those structures often add uncertainty and opacity to capital market deeply in need of more, rather than less, transparency.

How to create a Unicorn

Paul Graham, and Peter Thiel have forgotten more than I will ever know about how to create a Unicorn.

Here is a simplified version of their process for creating one:

1. Create value, by solving a big, painful problem

2. Scale, by getting a lot of users

3. Profit, by extracting value from those users, preferably by creating some sort of monopoly

As far as three-step processes go, this one is pretty compelling. To make a billion dollar business, you pretty much need to nail all three.

The thing about this process, is that even in the best of worlds you need liquidity today, in order to do 1 and 2. In order to get that liquidity, the technologist needs to promise the capitalist that there will be a stage 3.

The price that this deal is struck at is determined (in the capital market) by the answers to three questions: