We are all familiar with the term “unicorn,” aren’t we? The first thing that comes to mind is the famous mythical creature: a horse with a horn on its forehead. For some, the term implies a rare occurrence or thing that only a lucky few are able to see or witness. This particular association is not that far off from what the term means in the world of finances. Today we delve into the Unicorn startup, what it is and how this phenomenon has played out historically.
What is it?
A ‘unicorn’ is a familiar term within the venture capital industry. It is used primarily to describe a privately held startup company possessing a value that exceeds $1 billion. The popularization of the term was thanks to venture capitalist, Aileen Lee. She is the founder of CowboyVC, a seed stage venture capital fund operating in Palo Alto, California.
The term can also refer to a recruitment phenomenon occurring in the sector of human resources (HR). HR managers are likely to have high expectations in order to fill a position. This will inevitably result in them seeking out candidates with the right qualifications. Specifically, ones that are comparatively higher than what’s needed for a specific job. These managers are essentially looking for a unicorn. As such, this leads to a noteworthy disconnect. One that falls between their ideal candidate versus who they are able to hire from the group of people available.
There are a wide variety of unicorns out there. We will list them later, but for now we will briefly go over a few of the more notable ones. Some include the home-sharing giant, Airbnb, the video game company, Epic Games, and several fintech companies. Two examples of these particular enterprises are SoFi and Robinhood.
Origins
Aileen Lee was responsible for the coining of the term back in 2013. Her reasoning of choosing this particular name was that the mythical animal represents the statistical rarity of successful ventures. Several other options for potential names include “home run” and “mega hit” companies. According to her:
“But then I put ‘unicorn’ in and it all fit. I wanted to convey rarity and alchemy. It all read so much better.”
The term ‘decacorn’ refers to companies that surpass $10 billion. ‘Hectocorn’, on the other hand, applies to a company with a value of over $100 billion.
Lee’s first instance of writing about unicorns in the venture capital world was in her article, “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.” In this piece, she takes a look at software startups from the 2000s. She estimates that only 0.07% of them ever reach a valuation of $1 billion. She notes that startups successful in reaching the $1 billion mark are rare. So much so that finding one is about as likely as finding a mythical unicorn.
According to Lee, the first unicorns came about back in the 1990s. She points out that Alphabet – then Google – was the clear super-unicorn of the group. Its valuation would exceed $100 billion. A large number of unicorns were born in the 2000s, however Facebook is the only super-unicorn of the decade.
Unicorn valuation
Generally speaking, the value of unicorn startups draws from how investors and venture capitalists think they will grow. It ultimately all comes down to longer-term forecasting. Put simply, their valuations have absolutely nothing to do with the way in which they perform financially. As a matter of fact, a large number of these companies rarely, if ever, generate any profits at the start.
It’s important to note that investors and capitalists alike could potentially stumble across an array of hurdles. If there are no other competitors in the industry, this effectively makes the startup a first of its kind. Assuming there is no competition, there will likely be no other business model with which to compare. As a result, the process becomes considerably more tricky.
In the world of business
Whenever a company is looking for the best employees, its expectations have a tendency to be far too lofty. This is especially true when you compare them to the availability within the labour pool. Hiring managers typically track down or hold out for candidates possessing higher qualifications than what the job requires.
A medium-sized firm, for instance, may want to recruit someone who has experience in various fields. Some of which include marketing, social media, writing, management, and sales. Moreover, they would want them to be able to speak three different languages. Admittedly, it would be cheaper to hire one person with all those skills rather than multiple employees for separate tasks. However, it may prove to be too much for the new hire to handle, resulting in massive disappointment.
What is responsible for the rapid growth?
- Fast-growing method: Academics in 2007 state that investors and venture capital firms are adopting the ‘get big fast’ (GBF) strategy for startups. This method also goes by the name of ‘Blitzscaling’. GBF is a strategy where startups attempt to expand at a high rate through large funding rounds and price cutting. Doing so will allow them to acquire an advantage on market share. Likewise, they can quickly push away any competitors.
- Company buyouts: The creation of many unicorns was through buyouts that derive from large public companies. In an environment that has low interest rates and slow growth, many companies like Apple and Google focus on acquisitions. This is instead of drawing all of their attention on capital expenditures and the development of internal investment projects.
- Boost of private capital available: From 2013 to 2015, the total amount of private capital that would invest in software companies rose three-fold.
- IPO prevention: Through multiple funding rounds, there’s no requirement for companies to undergo an initial public offering (IPO) to obtain a capital. Similarly, they don’t have to go through an IPO to acquire a higher valuation. They can simply go back to their investors in order to get more capital. In addition, IPOs run the risk of causing a company to experience devaluation should the public market see a company being worth less than its investors.
- Advancements in technology: Startups are benefiting off of the surge of new technology of the last decade in order to reach Unicorn status. No doubt there has been an explosion of social media and startups have access to millions utilizing this technology. With it, they can effectively gain massive economies of scale. Furthermore, they will have the ability to grow their business at a quicker rate.
Report highlights
There are three key points from Lee’s report that showcase what she has learned in her research on unicorn startups:
- The ‘college dropout as unicorn founder’ story is pure fantasy. The image of the twenty-something college dropout as unicorn founder does not reflect the norm, according to Lee’s research. This is in contrast to what Bill Gates and Mark Zuckerberg quitting Harvard would have you believe. Out of the 39 unicorns founded between 2003 and 2013, she claims that those launching them were not in their 20s. As a matter of fact, according to Lee, the average age was 34.
- It’s better not to go solo. It is commonplace to portray unicorn founders as eccentrics who work better alone. The truth is that portrayal is inaccurate in most cases. Out of the 39 unicorns Lee lists, 35 have more than one founder. The unicorns actually have up to three co-founders on average. Having at least one founder who was there before is especially helpful. 80% of the unicorns have at least one founder who already founded a company. In some cases, they did so as early as their high school years.
- Elite schools actually do generate unicorns. This is probably the only myth surrounding unicorn founders that holds true in Lee’s research. A majority of unicorn founders were once attendees of top-tier colleges. Stanford, unsurprisingly, would go on to produce the most unicorns. In fact, one third of them have at least one Stanford alum as their founder. Harvard follows in the ranking, with graduates and dropouts alike founding eight unicorns on Lee’s list. Five companies have founders from UC Berkeley and the founders of four others are from MIT.
Notable examples of a Unicorn Startup
Once upon a time, the billion-dollar technology unicorn startup was a myth. Nowadays, it seems as if they are everywhere. What’s more, they receive support from a bull market, as well as a new generation of innovative technology.
Some noteworthy examples of unicorn startups include the following:
- Uber
- Airbnb
- Epic Games
- Snapchat
- DoorDash
- Bytedance
- UiPath
If you'd like to learn more about this topic, I'd suggest reading a book called 'From Startup to Unicorn: An Essential Guide to Build, Scale and Sustain Value for Platform and Tech Startups' and it's available on Amazon here - https://amzn.to/40vS0MT
