What is a unicorn business? Billion dollar startups and whether you should invest

In the investment world, a growing number of start-ups have reached billion-dollar valuations; they are called unicorns. But what does it take to be part of this club, and should investors put funds behind them? Let’s start with the basics.

What is a unicorn?

A unicorn is a private start-up valued at $1 billion or more. The term originated in the last decade when Aileen Lee, the founder of a Palo Alto-based venture capital fund, wrote about tech startups of the 2000s and found that less than 1% of between them had reached valuations of a billion dollars.

What types of industries do unicorns typically belong to?

Unicorn companies are usually innovative or disruptive companies that are expected to grow quickly. There is an estimate 1,101 unicorns worldwide, according to CB Insights, with a cumulative valuation of $3.67 billion (or an average of $3.3 billion per unicorn).

“Unicorns tend to appear where there’s a lot of rapid growth in the tech space and large markets,” says Julien L. Pham, founder and managing partner of Third Culture Capital (3CC), a private equity firm. risk whose mission is to increase equity. and diversity in health technology innovation. “[That includes] e-commerce, deep tech, SaaS (software as a service), mobile, fintechs, and of course, but not as often, healthcare. On rare occasions, new markets are “established” by unicorns. »

Currently, the Top 10 Unicorn Companies are:

  1. Uber
  2. Xiaomi
  3. Airbnb
  4. Palantize
  5. Didi Kuaidi
  6. Snapchat
  7. China Internet Plus
  8. Flipkart
  9. SpaceX
  10. pinterest

How are unicorn ratings determined?

This involves some guesswork. Because unicorns are startups without a long track record, their valuations are usually based on how investors and venture capitalists think a certain company will perform over time. Sometimes this involves using a competitor’s performance as the basis for determining a startup’s performance. The catch: Many of these companies are the first of their kind, so it can be difficult to determine how they might grow, if at all.

Over time, more and more companies reach that $1 billion valuation and far exceed it, with companies like TikTok and its parent company valued at $50 billion and $300 billion, respectively. This has caused some investors to question whether these valuations are fair or whether they could contribute to a possible unicorn bubble.

“The exercise of valuing a private company over the past few years has always been a bit of an art form,” says Pham. “Given the bull market environments, companies with $1 billion “on paper” valuations were based on many investors trying to strike a deal and artificially inflating said valuation. It’s important to know who the co-investors are and what their ongoing roles are in helping to build and scale the businesses, versus investors who are there for the journey. »

Should you invest in a unicorn business?

Investing in a unicorn business can be difficult for average investors, as most are funded by private investors or founders.

Of the more than 35 public software companies that reached valuations above $10 billion between 2004 and 2015, only six reached that level before going public, according to McKinsey. The others hit it on average more than eight years after their IPO, so it can be a bit of a waiting game. For private companies, going public could mean better access to capital and growth opportunities, but it could also spark public scrutiny.

It is also unclear how a company will perform after its IPO. Airbnb and Uber are two unicorn companies that went public with very different results. Airbnb opened at $146 per share on first day of trading; the following day, it more than doubled the $68 per share price set for its IPO the day before. Uber, on the other hand, disappointed in its stock market debut, falling 7.6% on its first day of trading on the New York Stock Exchange.

If you are an investor with a higher tolerance for risk than most, investing in a unicorn business might be the right decision for you. Although there is great risk, there can also be great reward if you can get in on the ground floor of an investment that is going to shake up a certain sector or industry. Nonetheless, investing money in speculative investments should always be done with caution, and it can be difficult to determine when you should go all out and whether or not a unicorn business will give you a better return on your investment.

“Generally, the idea is to invest in these companies early and maintain a significant equity stake through multiple cycles of growth,” says Pham. “[But] not all investors are able to follow and [they] could quickly dissolve.

Comments are closed.