Unicorn: What It Means in Investing, With Examples
Retail investors are unable to access unicorn investors, who are often venture capitalists or private investors. It's not required, yet many unicorns make their way to becoming publicly traded.
What Is a Unicorn?
A unicorn is a privately held startup valued at more than $1 billion. It's widely utilized in the venture capital sector. Aileen Lee, a venture capitalist, initially popularized the phrase. Unicorns are extremely rare, necessitating ingenuity. Due of their magnitude, unicorn investors are typically private or venture capitalists, making them inaccessible to regular investors. Although it is not required, many unicorns work their way to being public.
Understanding Unicorns
In finance, a unicorn refers to a privately owned startup valued at more than $1 billion. Achieving unicorn status is an uncommon accomplishment. To become a unicorn, firms need a unique idea, a clear vision for development, a strong business strategy, and effective communication with venture capitalists and private investors.
Unicorns have various escape choices available to them, including:
- Remaining private. Founders who wish to retain control typically keep their unicorns secret. However, this reduces the possibility for expansion. Funders want a return on their investment, therefore they must discover methods to offer it.
- Going public. An initial public offering (IPO) allows companies to raise funds for growth. Some unicorn leaders may be hesitant to go public because to concerns about diluting their ownership stake.
- Appealing to the buyer. Company owners and executives can achieve their objectives faster than if they remained private or went public.
Aileen Lee, founder of Palo Alto-based Cowboy Ventures, created the term "seed-stage venture capital fund."2She initially mentioned them in her essay, "Welcome to the Unicorn Club: Learning from Billion-Dollar Startups," in which she examined software businesses launched in the 2000s and calculated that just 0.07% of them ever achieved a $1 billion valuation. According to Lee, businesses that have reached this milestone are so uncommon that discovering one is comparable to finding a mythical unicorn.2
According to Lee, the first unicorns emerged in the 1990s. She observed that Alphabet (GOOG), then known as Google, was the group's unambiguous super-unicorn, with a valuation of more than $100 billion. Many unicorns were born in the 2000s, but Meta (META), previously Facebook, is the decade's sole super-unicorn.2Other well-known US-based unicorns include Airbnb, Epic Games, Robinhood, and SoFi.
Important: While unicorns are startups with valuations of over $1 billion, companies with valuations of over $10 billion are sometimes referred to as decacorns.
Read also: How to Secure Funding for Business Startup Costs
Special Considerations
The word is not limited to the realm of startups. The term "recruitment" is commonly used in the HR industry.
HR managers may have high expectations for filling a position, prompting them to seek individuals with greater qualifications for a given role. In essence, they hunt unicorns, resulting in a significant gap between their ideal candidate and those in the pool of persons accessible.
A medium-sized organization may seek candidates with marketing, social media, writing, sales, and management expertise. They may also look for someone who can speak three languages. While hiring one individual with all of those abilities is less expensive than hiring many people to do different jobs, it may be too much for the new recruit to manage, leading to disappointment.
Unicorn valuations.
Investors and venture capitalists value unicorns based on their potential for growth and development over time. This means their prices are unrelated to their financial success. In fact, many of these businesses seldom earn profits when they initially begin operations.
Investors and capitalists may face various challenges. If there are no other rivals in the field, making the startup unique, there may be no alternative business model to compare, making the process more challenging.
Unicorns and Venture Investments
Since Lee's piece, the term "unicorn" has come to refer to businesses in the technology, mobile technology, and information technology sectors—typically at the junction of all three—with extremely high values that are questionably supported by their underlying economics.
In a blog post, Benchmark Capital partner Bill Gurley discusses the distinction between late-stage private capital fundraising and an IPO. Gurley notes that since the 2010s, 80 private companies have raised financings at valuations over $1 billion, and late-stage investors have abandoned traditional risk analysis to acquire shareholding positions in potential 'unicorn' companies.
The question of whether the technology sector's unicorns constitute a reinflation of the dotcom bubble of the late 1990s continues to stir debate:
- People like John Mullins (who wrote the book The Customer-Funded Business) argue that the increase in the number of new companies valued above $1 billion is a clear sign of froth in markets.5
- Others argue that a large number of companies with high valuations is a reflection of a new wave of technologically-driven productivity, similar to the invention of the printing press nearly 600 years ago. For example, SV Angel made the most early-stage investments in companies valued at over $1 billion, according to 2019 data.
Read also: Digital Health Startups that Could Join the IPO Wave