What We're Missing About Building Exceptional Companies

June 20, 2025

Only 3% of unicorns become decacorns, yet 95% of the world's most valuable companies never saw venture funding. We think there might be patterns worth exploring beyond traditional venture approaches.

Patric Hellermann

Shub Bhattacharya

What We're Missing About Building Exceptional Companies

This Week On Practical Nerds - tl;dr

Only 3% of unicorns graduate to decacorn status

95% of off-spec companies never received venture funding

Vertical integration beats horizontal thin-slice approaches

Construction produces 115 companies worth $3.14 trillion combined

Traditional companies capture 25-50% of market spend

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Only 3% of unicorns graduate to decacorn status

Why do well-resourced unicorns struggle to compound further?

We discovered something interesting when we applied the Six Sigma methodology to the entire universe of companies. Out of 330-350 million registered companies worldwide, only ±1,130 qualify as statistical outliers - companies valued at $10-15 billion or more. (This is what in Six Sigma would be the famous 3.4 per million).

These are the true off-spec performers.

Of those 1,130 exceptional companies, only 100 became venture-backed decacorns in the last two decades. The remaining 1,030+ companies achieved their outlier status without recent venture funding.

Up to 95% of extreme outliers are missed by generalist venture !

Now consider this: The graduation rate from unicorn to decacorn sits at a shocking 3.3%. This is lower than the graduation rate from seed to Series A (50%) and even seed to Series B (25%). Think about that. A smaller proportion of unicorns become decacorns than seed companies reaching Series B.

Every additional billion in valuation statistically decreases graduation chances by 30%. This seems backwards. Unicorns should have solved the hard problems - they're well-resourced, have proven products, established partnerships, and experienced teams. Yet compounding becomes exponentially harder, not easier.

The fundamental question for us isn't necessarily just about execution. It might be about the underlying assumption that horizontal approaches addressing thin slices across multiple verticals represent the optimal path to building off-spec companies.

The venture world has convinced itself that addressing millions of users across multiple markets with thin revenue slices is the only way to build exceptional companies. But this strategy produces just 5% of all off-spec companies. The other 95% follow completely different playbooks focused on vertical integration and market domination within specific industries.

Monster Beverage was the best-performing S&P 500 stock for 23 consecutive years, beating Apple, Amazon, and Alphabet. It's a beverages company that understood compounding within its vertical rather than spreading thin across multiple markets.

The math suggests venture capital might have a blind spot - optimizing for the 5% while potentially overlooking the 95%.

95% of off-spec companies never received venture funding

What makes traditional companies outperform venture darlings?

Visa and MasterCard sit comfortably among the world's most valuable companies. Visa operates with 99% gross margins, 75-80% operating margins, and 57% net income margins. These aren't accounting tricks - they're pristine business fundamentals that most venture-backed companies can only dream of achieving.

Yet venture capital suggested we ignore these "boring" incumbents while chasing WeWork at a $45 billion valuation. WeWork's fundamentals made no sense on margin or cash flow levels, but it fit the horizontal software narrative that venture capital seemed to prefer.

The construction industry alone produces 115 off-spec companies with combined revenues of $3.14 trillion. These companies average $28 billion in revenue each. Even excluding Chinese companies, the remaining firms generate $1.9 trillion in combined revenue.

Compare this to venture's approach. Stripe attacks maybe 1-2% of any customer's P&L. Databricks, Snowflake, and CrowdStrike similarly capture low single-digit percentages of their customers' revenue. They address millions of verticals with extremely thin slices of addressable spend.

Meanwhile, a cement manufacturer might capture 50% of structural material spend, representing 25-40% of a project's total budget. A vertically integrated roofing company could attack 5-10% of overall construction spend, depending on scope and integration level.

The construction industry spends only 1-4% on software and payments combined. The remaining 45% goes to materials, another 45-50% to labor and services. Venture capital fights over the tiny software slice while ignoring the massive material and service opportunities.

Traditional off-spec companies succeed by dominating large portions of spend within specific verticals rather than capturing tiny portions across many verticals. They understand that 50% of one market often exceeds 2% of fifty markets.

Caterpillar generates $67 billion in revenue. CRH and Holcim each produce $30-35 billion. These aren't accident - they're the natural result of vertical integration and market focus.

It seems venture capital may have created constraints by focusing primarily on horizontal thin-slice companies while potentially missing vertical integration opportunities.

Vertical integration in the project-economy beats horizontal thin-slice approaches (for us)

Why should any vertical produce off-spec companies?

SpaceX didn't become a Hectocorn by building software for multiple industries. Neither did Tesla, BYD, or Anduril. Each focused on vertical integration within specific markets - aerospace, automotive, and defense respectively.

When Patric worked in corporate finance, one of his early projects was working for SunTech, at the time a four-year-old Chinese solar manufacturer which scaled insanely quickly to vertical integration with 10,000 employees (in year 4 !). It was simultaneously a startup and the world's largest solar module manufacturer at the time. It achieved massive scale through physical integration, not horizontal expansion into thin slices of software across markets. It committed.

The venture world has convinced itself that horizontal approaches represent the only path to building exceptional companies. This observation suggests that if you limit yourself to chasing the 50-100 venture decacorns instead of understanding how the other 1,030+ extreme outlier companies achieved their status, you might be narrowing your opportunity set.

Musk isn't rebuilding PayPal with Tesla or SpaceX. He's building vertically integrated companies that dominate specific markets. The same pattern appears in successful Chinese companies like BYD (22 years old) and Xiaomi's automotive division.

The key insight involves recognizing that venture capital has temporarily forgotten its own history. Decades ago, VCs invested in Apple and Nvidia - vertically integrated hardware companies. The current generation appears to have learned lessons from cloud and sharing economy investments but perhaps forgot the fundamental principles that created many of today's most valuable companies.

Building modern versions of vertically integrated dominant industry players offers a clearer path to off-spec status than horizontal thin-slice approaches. The proof exists in current market leaders across construction, manufacturing, and other industrial sectors.

The question isn't necessarily whether vertical integration works - it appears to produce 95% of off-spec companies. The question might be whether venture capital will recognize this opportunity or continue focusing primarily on the same 5% while potentially overlooking the other 95%.

Vertical integration with modern technology and operational efficiency might offer a path to recreate established success patterns in an accelerated timeframe.

Conclusion: The Compound Focus Framework

The path to building exceptional companies requires three fundamental shifts. First, recognize that 95% of off-spec companies achieved their status through vertical integration, not horizontal expansion. Second, understand that capturing large portions of specific market spend typically outperforms capturing tiny portions of multiple market spend. Third, focus on industries with proven track records of producing off-spec companies rather than limiting yourself to traditional venture categories.

We think we should consider building modern versions of the companies that dominate the 1,030+ list, not just chasing the next 50-100 (fleeting) venture-playbook decacorns. The observations suggest that if you want to build an outlier company, it might be worth studying how outliers are actually built, not just how venture capital traditionally thinks they should be built.

The compound focus framework prioritizes depth over breadth, market domination over market expansion, and vertical integration over horizontal distribution. It's time to stop playing the wrong game.

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