What Are Unicorns?
In the world of finance, “unicorn” is a term that describes a privately-owned startup having a valuation of over $1 billion. In April 2021, more than 600 unicorns exist around the world. Well-known former unicorns include Airbnb, Facebook, and Google. Some variants include a decacorn, valued at over $10 billion, and a hectocorn, also valued at over $100 billion.
The unicorn was first popularized in 2013 by venture capital investor Aileen Lee, the founder of a venture capital fund from seed-stage based in Palo Alto, California, CowboyVC.
She described such startup companies as “rare startups,” although the increasing number of such companies now doesn’t make it rare any longer.
What are Unicorns?
A unicorn in the financial world is a startup that is privately-owned with a valuation exceeding $1 billion. Most popular unicorns based in the U.S. include video game company Epic Games, home-sharing giant Airbnb, also fintech companies SoFi and Robinhood.
In her article, Aileen Lee first wrote about unicorns in the venture capital world, “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.” Aileen looked at software startups founded in the 2000s and estimated that only 0.07% of them ever reach a $1 billion valuations. Startups that managed to attain the $1 billion mark, she noted, are so rare that finding one was as difficult as finding a mythical unicorn.
According to her, the first unicorns were founded in the 1990s. Alphabet (GOOG)—then Google—Lee noted, was a typical super-unicorn of the group having a more than $100 billion valuation. Many unicorns were established in the 2000s, though Facebook (FB) is the decade’s only super-unicorn.
A company tagged as a Unicorn must be a privately owned startup company valued over $1billion. Startups that exceed $10 billion valuations are grouped under a term called decacorn (a super unicorn). Some examples of decacorn are WeWork, SpaceX, and Dropbox.
For startups based out of Canada, an exclusive term is given to them instead of a unicorn. It is ‘narwhal.’ Any Canadian startup company having a valuation of over $1 billion is known as the narwhal. Wattpad and Hootsuite are examples of Narwhal companies.
How to look for a Unicorn Company
Valuations are developed on how investors and venture capitalists participate in the financing rounds of the companies. All unicorns are startups, and their value is primarily based on a forecast of their growth potential and expectancy in development. The unicorns’ valuation has nothing to do with their actual financial performance or other fundamental data. Also, note that many companies rarely generate any profits at their startup stage despite their abnormally high valuations.
Valuing unicorns might seem a complex process that involves considering several factors and the development of long-term forecasts. Other complications often arise as a result of the business models of the companies. Some companies were the first business of their kind in an industry, which constitutes even more complications in the valuation process.
Examples of Unicorns
Besides being merely mythological creatures, the term unicorn is a regular feature in popular finance and business discussions. Some popular U.S.-based unicorns include Uber, Airbnb, SpaceX, Palantir Technologies, WeWork, and Pinterest. China claims several unicorns, including Didi Chuxing, Xiaomi, China Internet Plus Holding (Meituan Dianping), and Lu.com. More than 600 unicorns are recorded around the world as of June 2020. Comprehensively, they have raised $442 billion, all valued at about a total of $2 trillion.
Nuro, an autonomous vehicle delivery company founded by two engineers from Waymo, Google’s self-driving car project. Nuro was founded in 2016, and after receiving a $940 million investment from SoftBank Group, became a unicorn startup. The startup put the company’s valuation at $2.7 billion.
The vehicle company found a unique space in the autonomous vehicle industry, focusing on zero-emissions local delivery vehicles. Nuro, since then, has grown and acquired other startups, which includes Ike Robotics. They now have a few pilots, including its R1 and R2 generation of cars prototyping deliveries of medical supplies in California and groceries in Fry’s Food and Drug and Kroger stores. Nuro hit a $5 billion valuation in November 2020.
Instacart is another unicorn company with over $2.7 billion in funding. Instacart is a grocery delivery app. In 2020, the company was founded in San Francisco and boasted over 500,000 items from local stores, including Safeway, Whole Foods, Costco, Harris Teeter Jewel-Osco. In June 2020, the company recorded a $13.7 billion valuation. With its most recent $225 million funding round led by DST Global and General Catalyst, the company could accomplish this.
Features of a Unicorn Startup
It’s not easy to become a unicorn company, and each existing unicorn today has its own story with some features that worked in its favor. Below are a few pointers that are common across unicorns:
The ‘firsts’: Obviously, unicorns are mostly the starters in their model industry. They bring innovations that change people’s way of doing things and gradually create a necessity for their products or service. They also have a way to keep innovation up and running to stay ahead of competitors, which might later boom.
Disruptive innovation: Almost all the unicorns have brought a disruption in the industry they belong to. For instance, Uber changed commuting. Airbnb changed the traditional way people planned their stay while traveling, and Snapchat disrupted the usage of the social media network.
High on tech: Another unique trend across unicorns is that their business model runs on tech. Uber’s model was acceptable by creating a friendly app. Airbnb made the planet appear smaller by using the best of the internet.
According to a recent survey, most unicorn software category makes up 87 percent of unicorn products, hardware makes up 7%, and other products and services make up 6%.
Consumer-centric: 62 percent of unicorns are B2C businesses. Its mission is to simplify and make it easier for customers and become a part of their daily lives. Another main feature of these startups is that they keep things affordable. Spotify, for example, has made music listening more accessible to people all over the world.
Privately owned: Most unicorns are privately owned, which gets their valuation bigger when an established company invests in it.
The term “unicorn” has evolved from a mythological beast to a common occurrence in business and finance discussions. Unicorn companies are now well-known and have carved out a niche for themselves in the industry. That said, not every unicorn needs to end up being a successful startup. The argument is that if a startup reaches a certain milestone, it must continue to work hard.