An increasingly prevalent term in the startup ecosystem, ‘unicorn company,’ or simply ‘unicorn,’ has transformed from a mythical creature into a business phenomenon. Unicorns are no longer just creatures of fantasy; they are now symbolic of extraordinary success in the modern corporate world. This article delves into the concept of unicorn companies, their characteristics, how their valuation is determined, and reasons for their typically high valuations.
What’s a unicorn startup?
A unicorn startup, or unicorn company, is a private company with a valuation over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. In her view, these startups are so unique and high-performing that they’re as scarce and miraculous as unicorns.
Characteristics of a unicorn company
Several characteristics set unicorn companies apart from other startups. First and foremost, their valuation exceeds $1 billion while still maintaining private status, meaning they haven’t yet gone public via an IPO (Initial Public Offering) or been acquired.
In the corporate world, being disruptive is often seen as a positive trait, particularly for companies striving to achieve unicorn status. Disruption denotes a significant innovation that dramatically alters the functioning of an industry or market. Such game-changers typically emerge at the market’s lower end, offering simpler, more cost-effective solutions that fulfill the same requirements as their more expensive counterparts.
These offerings gain traction among consumers due to their cost-effectiveness, allowing the company to gradually ascend the market ladder, potentially even dominating it. A prime example of this is Netflix, which revolutionized the video and television industry by offering affordable streaming services.
Unicorn companies typically leverage cutting-edge technology and innovation to disrupt existing markets or create new ones. They exhibit high growth rates, often fueled by substantial venture capital investments. Additionally, unicorns often operate in industries with large total addressable markets, enabling their massive growth. Examples of industries where unicorn companies are often found include tech, fintech, healthcare, e-commerce, and transportation.
Lastly, unicorns are often led by visionary leaders with ambitious goals. These individuals are not merely interested in creating profitable businesses, but in fundamentally changing the way business is done or even how society functions.
How many unicorns are there?
According to data from CB Insights, as of July 2023, the global tally of unicorn companies — startups valued at over $1 billion — surpasses 1,200. Notable alumni of the unicorn club include household names such as Airbnb, Facebook, and Google. There are also variations to the unicorn term, with ‘decacorn’ denoting companies valued over $10 billion and ‘hectocorn’ for those over $100 billion. For a comprehensive understanding of each company, including their valuations, investors, and additional details, download the complete list today.
Valuation of Unicorns: How are unicorn valuations determined?
The valuation of a unicorn is largely determined by its perceived potential to disrupt markets and achieve substantial profits. Investment rounds, where venture capitalists and other investors buy shares of the company, primarily set these valuations. The amount of money an investor is willing to pay for a share compared to the percentage of the company that the share represents results in the overall company valuation.
However, it’s worth noting that these valuations are not always an accurate reflection of the company’s current profitability. Instead, they are often based on the company’s growth potential, with the assumption that profitability will come in the future.
Reasons for the Abnormally High Valuation of Unicorns
Unicorn companies often have high valuations due to a combination of factors. Firstly, these startups typically operate in high-growth industries or possess innovative business models, leading investors to believe they will capture a large market share.
Secondly, in an era of low-interest rates, investors are more inclined to take higher risks for potentially higher returns, which often leads to increased investment in startups and subsequent inflation of their valuations.
Lastly, the “Fear Of Missing Out” (FOMO) can drive up valuations. Investors, worried about missing the next big success story, may invest heavily in companies they believe could become the next Uber or Airbnb, driving up their valuations.
The countries with the most unicorns
As of my knowledge cutoff in September 2021, the United States and China are the countries with the most unicorns. The U.S., being the birthplace of companies like Uber, Airbnb, and SpaceX, leads the pack. China, with companies like ByteDance and Didi Chuxing, also has a significant share of global unicorns. Other countries with a noticeable number of unicorns include the United Kingdom, India, and Germany.
Origins of the Term ‘Unicorn Company’
The term “Unicorn Company” was coined by Aileen Lee, founder of CowboyVC, a seed-stage venture capital fund based in Palo Alto, California. She used the term to represent the rarity of such high-performing companies when she first used it in a TechCrunch article in 2013. Lee noted that like mythical unicorns, companies with a valuation of over $1 billion were not merely rare but seemed almost magical in their ability to grow and succeed. The term has since been widely adopted in the startup and investment communities worldwide.
In conclusion, unicorn companies have become synonymous with startup success, symbolizing innovative disruption, high growth, and immense value creation. Despite their seemingly high valuations, their potential to revolutionize industries and redefine markets make them highly sought-after investment targets.
How Unicorns Grow
Unicorn companies grow through a combination of innovation, market disruption, and significant venture capital funding. These companies typically start by identifying a gap in the market or an industry that’s ripe for disruption. They then develop an innovative product or service that fills this gap or disrupts the status quo.
Rapid growth for these startups often comes from scaling their innovative business models. They might offer a product or service for free or at a low cost to quickly gain a large user base. Monetization comes later through advertising, data, subscription fees, or premium services. For instance, many social media platforms have used this model, including Facebook and Twitter.
Venture capital plays a significant role in the growth of unicorn companies. These startups require substantial funding to develop their product or service, gain users, and scale their operations before they become profitable. Venture capital firms, recognizing the potential for high returns if the startup is successful, are often willing to invest large sums of money.
Growth Lessons from New Unicorns
- Hire the right people. For a startup to thrive, it’s crucial to assemble a robust team that can propel its growth. It’s essential to recruit individuals who not only possess the necessary skills but also share the same values. When everyone aligns on the company’s direction, it fosters a more cohesive collaboration, enabling the team to effectively achieve their objectives.
- Solve real world problems. Products that cater to the needs or desires of customers are inherently likely to attract users. Therefore, it’s crucial to pinpoint a problem your business intends to address right from the start. This strategy was successfully employed by Canva, an online platform for creating infographics, leading to its achievement of unicorn status in 2020.
- Manage Costs Effectively. To achieve unicorn status, businesses should adopt a “camel” mindset, symbolizing adaptability, perseverance, and resilience, much like a camel surviving in a desert. This approach is particularly beneficial during periods of business uncertainty, such as a pandemic, as it enables companies to navigate crises and maintain growth amidst volatile conditions. This strategy necessitates prudent financial planning and cost management throughout the business lifecycle, aiming for sustained long-term growth. By minimizing unnecessary expenses and investing in crucial areas like the product and team, businesses can effectively reduce their burn rate.
- Cultivate Relationships. Establishing relationships is vital for business success, as a robust network can facilitate finding appropriate business partners, potential clients, or investors. For emerging companies, building a solid relationship with experienced business leaders can be particularly advantageous, as they can offer valuable business insights and impart skills typically acquired through trial and error.
- Build a solid foundation. While aspiration can fuel expansion, moving too rapidly could lead to a disastrous downfall.
Should you invest in a unicorn company?
Investing in a unicorn company can be a high-risk, high-reward proposition. On the one hand, unicorn companies offer the potential for massive returns. If the startup is successful, early investors could make many times their initial investment.
On the other hand, investing in unicorns can be risky. These startups often operate in unproven markets, and their high valuations are based on growth potential rather than current profitability. Additionally, because these companies are private, they are not subject to the same level of financial scrutiny as public companies, making it harder for investors to assess their financial health.
It’s essential to thoroughly research and understand the business model, market potential, and risks before investing in a unicorn company. As with all investments, it’s also crucial to ensure that investing in unicorns fits within your overall investment strategy and risk tolerance.
Pros of Investing in Unicorn Companies
There are several benefits to investing in unicorn companies. These include:
- High Return Potential: If the unicorn is successful and goes public or is acquired, early investors can achieve significant returns.
- Innovation Exposure: Unicorns often operate at the cutting edge of technology and innovation, providing investors with exposure to new and exciting markets.
- Diversification: Investing in unicorns can provide diversification benefits, especially for investors whose portfolios are heavily weighted towards traditional assets like stocks and bonds.
Cons of Investing in Unicorn Companies
Despite the potential benefits, investing in unicorn companies also comes with risks. These include:
- Valuation Risk: Unicorn companies are often valued based on future growth potential rather than current profitability. If the company does not meet these growth expectations, its valuation could fall significantly.
- Liquidity Risk: Investments in unicorn companies are often illiquid, meaning they cannot be easily sold or converted into cash. Investors may have to wait for an IPO or acquisition to see a return on their investment.
- Market Risk: Unicorn companies often operate in new or rapidly changing markets. Changes in market conditions, technology, or consumer preferences could negatively impact the company’s business model.
- Lack of Transparency: As private companies, unicorns are not required to disclose financial information publicly, making it harder for investors to assess the company’s financial health.
In conclusion, while unicorn companies can offer significant return potential, they also come with considerable risks. Therefore, it’s essential for investors to carefully consider their risk tolerance and conduct thorough due diligence before investing in these companies.
Types of Unicorns
While the term “unicorn” is primarily used to describe privately held startup companies valued at over $1 billion, variations of the term have emerged to describe companies of different sizes or characteristics. Here are some examples:
- Decacorn: This term is used to describe companies that have reached a $10 billion valuation. Examples of decacorns include SpaceX, Stripe, and Airbnb before they went public.
- Hectocorn: A company valued at over $100 billion, such as ByteDance, the parent company of TikTok, is known as a hectocorn.
- Narwhal: This term is sometimes used to describe Canadian companies that are valued at over $1 billion.
- Camel: This term is often used to describe companies that have managed to grow significantly without relying on substantial amounts of venture capital funding. While not directly related to their valuation, these companies often reach unicorn status.
Examples of successful unicorn Companies in North America
North America, and particularly the United States, has been a significant hub for unicorn companies. The region is home to many of the world’s most renowned tech companies and startup ecosystems, such as Silicon Valley and the growing tech hub in Austin, Texas. Here are a few notable examples:
- SpaceX: Founded by Elon Musk, SpaceX is an American private aerospace manufacturer and space transportation company. The company is known for developing the Falcon and Starship rockets, and for launching the first commercially built and operated crewed spacecraft to the International Space Station.
- Stripe: Headquartered in San Francisco, Stripe is a technology company that builds economic infrastructure for the internet. Businesses of every size from startups to public companies use their software to accept online payments and run technically sophisticated financial operations.
- Airbnb: Airbnb is a platform that connects people who want to rent out their homes with people who are looking for accommodations. Founded in 2008 and headquartered in San Francisco, it has since grown into a global company with a presence in over 200 countries and regions.
- Epic Games: Based in Cary, North Carolina, Epic Games is a video game and software developer best known for Fortnite, one of the world’s most popular video games. It is also the creator of the Unreal Engine, a leading game engine used by many other game developers.
- Rivian: An American electric vehicle automaker and automotive technology company, Rivian is known for producing the R1T, an all-electric pickup truck, and the R1S, an all-electric SUV.
- DoorDash: An American on-demand food delivery service, DoorDash is a technology company that connects people with the best in their cities, enabling local businesses to reach new customers and making it easier for customers to access their favorite restaurants.
These companies illustrate the broad range of sectors in which unicorn companies have been created in North America, from space technology and financial services to electric vehicles and online marketplaces. It’s worth noting that the availability of venture capital, the presence of world-class tech talent, and a culture of entrepreneurship have played significant roles in the success of these companies.
Examples of unicorn companies in Europe
Unicorn companies, or startups valued at over $1 billion, are not exclusive to the United States and China. European countries have also produced several high-profile unicorn companies, particularly in the tech sector. These unicorns span a wide variety of industries, including financial technology (fintech), software, e-commerce, and transportation.
Here are a few notable examples of European unicorns:
- Klarna: Based in Sweden, Klarna is a fintech company that provides online financial services such as payments for online storefronts and direct payments, post-purchase payments, and more. As of my knowledge cutoff in September 2021, it was valued at $45.6 billion.
- Revolut: A UK-based fintech company, Revolut offers banking services including a pre-paid debit card, currency exchange, cryptocurrency exchange, and peer-to-peer payments. It was valued at $33 billion in 2021.
- UiPath: A leading provider of Robotic Process Automation (RPA), UiPath is a Romanian-born company, though it later moved its headquarters to New York. As of its initial public offering (IPO) in April 2021, UiPath’s market cap was approximately $29 billion.
- Spotify: Based in Sweden, Spotify is a well-known music streaming platform that has transformed the music industry. As of its direct listing in 2018, Spotify had a market cap of nearly $30 billion.
- Delivery Hero: This German company operates in the online food-delivery market and has expanded to operate in over 40 countries across four continents. As of my last update in September 2021, Delivery Hero had a market cap of over $20 billion.
These are just a few examples of the unicorn companies that have originated in Europe. These unicorns showcase the innovation and growth potential present in Europe’s startup ecosystem. Furthermore, the growth of European unicorns suggests that the global startup landscape is becoming more geographically diverse, with significant tech hubs emerging outside of the traditional centers in the U.S. and China.
Examples of unicorns in Asia
Asia, especially China and India, has been a hotbed for unicorn startups, driven by large consumer markets, rapid digitization, and increasing venture capital activity. The region has produced some of the world’s most valuable startups spanning diverse sectors like technology, ecommerce, and fintech. Here are some notable examples:
- ByteDance: This Beijing-based company, most known for its popular short video app TikTok (known as Douyin in China), is among the world’s most valuable unicorns. It also operates several other content platforms that cater to specific user interests.
- Didi Chuxing: Another Chinese company, Didi Chuxing, is one of the world’s leading ride-hailing platforms. It has also expanded into services like food delivery and financial services.
- Grab: Based in Singapore, Grab began as a ride-hailing app but has since become a “super app” in Southeast Asia, offering a range of services including food delivery, digital payments, and even financial services.
- Gojek: Indonesia’s Gojek is another “super app,” offering more than 20 services including ride-hailing, food delivery, digital payments, and more. It has recently merged with Tokopedia, forming a powerhouse named GoTo.
- Paytm: One of India’s biggest fintech startups, Paytm offers a range of services including mobile recharging, bill payments, ticket bookings, and a digital wallet. It’s backed by notable investors like SoftBank and Ant Financial.
- Byju’s: Also from India, Byju’s is an edtech company that provides an online learning platform with courses for students from primary to secondary school.
Succesful unicorns in South America
South America, although not as well-known as Silicon Valley or China for its tech scene, has begun to make a mark on the global stage with several high-profile unicorn startups. Here are some notable examples:
- Nubank: Based in Brazil, Nubank is a fintech company that operates as a digital bank. Offering a credit card fully managed by a mobile app, and later, a digital account and personal loan service, Nubank has significantly disrupted the banking industry in Brazil and beyond.
- Rappi: Rappi is a Colombian delivery service startup that provides a wide range of services – including grocery shopping, food delivery, and even cash withdrawals. Often compared to UberEATS or Postmates, Rappi has become a dominant player in the on-demand delivery service market in Latin America.
- MercadoLibre: An Argentine company, MercadoLibre operates a marketplace in Latin America and is one of the region’s most respected tech companies. While it’s no longer a startup (having been publicly traded since 2007), its size, influence, and innovation in e-commerce and fintech (through its payment platform Mercado Pago) make it worth mentioning.
- Loggi: Loggi is a Brazilian logistics company that connects businesses, riders, and drivers to deliver goods across Brazil. It uses its technology platform to offer a variety of delivery services, including food delivery, e-commerce delivery, and courier services.
These companies illustrate that innovation and disruptive potential are not confined to traditionally recognized tech hubs. The presence of these unicorns in South America indicates a maturing startup ecosystem with a growing global impact.
Unicorns in Africa
Africa has been a rising player in the global startup ecosystem, producing a growing number of unicorn companies despite challenges such as limited access to funding and infrastructure constraints. Here are a few notable African unicorn companies:
- Jumia: Known as the “Amazon of Africa”, Jumia is an online marketplace for electronics, fashion, and other categories. Based in Nigeria and operating in multiple African countries, Jumia was Africa’s first tech startup to be listed on the New York Stock Exchange.
- Fawry: Fawry is an Egyptian fintech company offering innovative and convenient electronic payment solutions. The company became a unicorn following a significant boost in its market value in 2020.
- Interswitch: Another Nigerian company, Interswitch is a payment processing company that provides electronic transaction switching and payment processing. In 2019, it reached unicorn status following an investment from Visa.
- Flutterwave: A US and Lagos-based fintech, Flutterwave provides a payment infrastructure for global merchants and payment service providers across the continent. It reached unicorn status in 2021 following a significant funding round.
Unicorns in Australia
Australia has also seen its fair share of unicorn companies, primarily in the technology sector. While Australia may not have as many unicorns as other regions like North America or Asia, its startup ecosystem has grown considerably over the past few years. Here are some notable Australian unicorn companies:
- Canva: One of the most famous Australian unicorns, Canva is a graphic design platform used to create social media graphics, presentations, posters, and other visual content. As of my knowledge cutoff in September 2021, it had a valuation of $40 billion.
- Atlassian: Although Atlassian, a software company best known for its issue tracking application Jira, is now publicly traded, it reached unicorn status while still private. It continues to be a major player in the global software industry.
- Airwallex: Airwallex is a fintech company focused on transforming the way businesses move and manage money globally. It reached unicorn status in 2019.
- Afterpay: Known for introducing the ‘buy now, pay later’ model in Australia, Afterpay reached unicorn status before being acquired by Square Inc. in 2021.