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What is a unicorn company? Billion Dollar Startups and If You Should Invest



In the investment world, more and more startups are reaching multi-billion dollar valuations; they are called unicorns. But what does it take to be a part of this club and should investors invest in them? Let’s start with the basics.

What is a unicorn?

The unicorn is a privately held startup with a valuation of $1 billion or more. The term emerged a decade ago when Aileen Lee, founder of Palo Alto-based venture capital fund, wrote an article about 2000s tech startups and found that less than 1 % of which reach multi-billion dollar valuations.

What industries do unicorns fall into?

Unicorns are often innovative or disruptive companies that are expected to grow rapidly. There is an estimate 1,101 unicorns around the world, according to CB Insights, with a cumulative valuation of $3.67 billion (or an average of $3.3 billion per unicorn).

Julien L. Pham, founder and managing partner of Third Culture Capital (3CC), a venture capital firm with a mission to drive equity, said: “Unicorns tend to emerge. present in places where there is a lot of rapid growth in the large market and technology space. and diversity in medical technology innovation. “[That includes] e-commerce, deep tech, SaaS (software as a service), mobile, fintech and of course, but not often, healthcare. In rare cases, new markets are ‘set up’ by unicorns.”

Currently, the Top 10 unicorn companies to be:

  1. Uber
  2. Xiaomi
  3. Airbnb
  4. Palantir
  5. Didi Kuaidi
  6. Snapchat
  7. China Internet Plus
  8. overturned car
  9. space
  10. Pinterest

How is unicorn valuation determined?

It involves some guesswork. Because unicorns are startups with no track record, their valuation is often based on how investors and venture capitalists think a given company will perform over time. . Sometimes this involves using competitor performance as the basis for determining how a startup can perform. The bottom line: A lot of these companies are the first of their kind, so it can be difficult to determine how they might grow, if at all.

As time goes on, more and more companies reach that $1 billion valuation and outpace it, with companies like TikTok and its parent company are valued at $50 billion and $300 billion, respectively. This has made some investors wary about whether these valuations are fair or whether they could contribute to potential. unicorn bubble.

“The valuation of a private company in recent years has always been an art form,” Pham said. “Give bull market Environmentally, companies have a valuation of $1 billion ‘on paper’ based on multiple investors trying to strike a deal and artificially increase said value. It is important to know who the co-investors are and their ongoing role in helping to build and scale the company, versus investors who are just there to run.”

Should you invest in a unicorn company?

Investing in a unicorn company can be a challenge for the average investor, as most are funded by private investors or founders.

Of the more than 35 public software companies that reached a valuation of up to $10 billion between 2004 and 2015, only six reached that level before going public, according to Mckinsey. The rest reach it on average more than eight years after their IPO, so this could be a bit of a waiting game. For private companies, going public can mean greater access to capital and growth opportunities, but it can also invite public scrutiny.

It is also unclear how a company will function after going public. Airbnb and Uber are both unicorns that have gone public with very different results. Airbnb opened at $146 per share on its first trading day; the next day, it more than doubled the $68 per share price set for the IPO the day before. On the other hand, Uber disappointed with its IPO debut, falling 7.6% on its first day of trading on the New York Stock Exchange.

If you’re an investor with a higher tolerance for risk than most, investing in a unicorn company could be the right move for you. While there is great risk that comes with it, there can also be great rewards if you can get in from the very beginning an investment that will shake up a certain sector or industry. However, putting money into speculative investments should always be done with caution, and it can be difficult to determine when you should go all out and whether a unicorn company will give you the best returns. higher investment or not.

“Typically, the idea is to invest in those companies early and maintain a large equity stake over multiple rounds of growth,” Pham said. “[But] not all investors have the ability to monitor and [they] can be quickly diluted.”

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