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Unicorn (finance)

From Wikipedia, the free encyclopedia

Delivery robot company Starship Technologies is an Estonian unicorn.
Self-driving truck manufacturer Einride is a Swedish unicorn.
Hypercar manufacturer and EV technology developer Rimac Automobili is a Croatian unicorn.
Payment provider Adyen is a Dutch decacorn.
Spacecraft manufacturer SpaceX is an American centicorn.

In business, a unicorn is a startup company valued at over US$1 billion which is privately owned and not listed on a share market.[1]: 1270 [2] The term was first published in 2013, coined by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.[3][4][5][6]

Many unicorns saw their valuations fall in 2022 as a result of an economic slowdown caused by the COVID-19 pandemic, an increase in interest rates causing the cost of borrowing to grow,[7] increased market volatility, stricter regulatory scrutiny and underperformance. CB Insights identified 1,248 unicorns worldwide as of May 2024.[8] Unicorns with over $10 billion in valuation have been designated as "decacorn" companies.[9] For private companies valued over $100 billion, the terms "centicorn" and "hectocorn" have been used.[10]

History

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Aileen Lee originated the term "unicorn" in a 2013 TechCrunch article, "Welcome To The Unicorn Club: Learning from Billion-Dollar Startups".[4] At the time, 39 companies were identified as unicorns.[11] In a different study done by Harvard Business Review, it was determined that startups founded between 2012 and 2015 were growing in valuation twice as fast as startup companies founded between 2000 and 2003.[12]

In 2018, 16 US companies became unicorns, resulting in 119 private companies worldwide valued at $1 billion or more.[13] Globally, according to CB Insights, there were more than 803 unicorns as of August 2021, with ByteDance, SpaceX and Stripe among the largest,[14] and 30 decacorns, including SpaceX, Getir, Goto, J&T Express, Stripe, and Klarna.[14]

The surge of unicorns was reported as "meteoric" for 2021, with $71 billion invested in 340 new companies, a banner year for startups and for the US venture capital industry; the unprecedented number of companies valued at more than $1 billion during 2021 exceeded the sum total of the five previous years.[15] Six months later, in June 2022, 1,170 total unicorns were reported.[16] IPL with $10.9 billion made into decacorn in 2022. The growth of unicorns has slowed more recently with 1248 total unicorns reported in May 2024.[8]

Reasons for rapid growth of unicorns

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Fast-growing strategy

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During the mid-2000s, investors and venture capital firms were adopting first-mover advantage and get big fast (GBF) strategies for startups, also known by the neologism, "blitzscaling".[17] GBF is a strategy where a startup tries to expand at a high rate through large funding rounds and price cutting to gain an advantage on market share and push away rival competitors as fast as possible.[18] The rapid returns through this strategy seem to be attractive to all parties involved, despite the cautionary note of the dot-com bubble of 2000, as well as a lack of long-term sustainability in value creation of emerging companies of the Internet age.[19]

Company buyouts

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Many unicorns were created through buyouts by large public companies. In a low-interest-rate and slow-growth environment, many companies like Apple, Meta, and Google focus on acquisitions instead of focusing on capital expenditures and development of internal investment projects.[20] Some large companies would rather bolster their businesses through buying out established technology and business models rather than creating it themselves.

Increase in private capital available

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The average age of a technology company before it goes public is 11 years, as opposed to an average life of 4 years back in 1999.[21] This new dynamic stems from the increased amount of private capital available to unicorns and the passing of the US's Jumpstart Our Business Startups (JOBS) Act in 2012, which increased by a factor of four the number of shareholders a company can have before it has to disclose its financials publicly. The amount of private capital invested in software companies has increased three-fold from 2013 to 2015.[22]

Prevent IPO

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Through many funding rounds, companies do not need to go through an initial public offering (IPO) to obtain capital or a higher valuation; they can just go back to their investors for more capital. IPOs also run the risk of devaluation of a company if the public market thinks a company is worth less than its investors.[22] A few recent examples of this situation were Square, best known for its mobile payments and financial services business, and Trivago, a popular German hotel search engine, both of which were priced below their initial offer prices by the market.[23][24]

This was because of the severe over-valuation of both companies in the private market by investors and venture capital firms. The market did not agree with both companies' valuations, and therefore, dropped the price of each stock from their initial IPO range. Investors and startups may choose to avoid an IPO due to increased regulations. Regulations like the Sarbanes–Oxley Act have implemented more stringent regulations following several bankruptcy cases in the U.S. market that many of these companies want to avoid.[20]

Technological advances

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Startups have capitalized on the rapid growth of new technology to obtain unicorn status. With the advent of social media and access to millions utilizing this technology to gain massive economies of scale, startups have the ability to expand their business faster than ever.[20]

Valuation

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The valuations that designate start-up companies as unicorns and decacorns differ from established companies. A valuation for an established company stems from past years' performances, while a start-up company's valuation is derived from its growth opportunities and its expected development in the long-term for its potential market.[25] Valuations for unicorns usually result from funding rounds of large venture capital firms investing in a start-up company. Another significant final valuation of start-ups is when a much larger company buys out a company, giving it that valuation; some examples are Unilever buying Dollar Shave Club and Facebook buying Instagram for $1 billion each, effectively turning Dollar Shave Club and Instagram into unicorns.[26][27]

Bill Gurley, a partner at venture capital firm Benchmark, predicted in March 2015 and earlier that the rapid increase in the number of unicorns may "have moved into a world that is both speculative and unsustainable", that will leave in its wake what he terms "dead unicorns".[28][29][30] Also he said that the main reason of unicorns' valuation is the "excessive amount of money" available for them.[31] Similarly, in 2015 William Danoff, who manages the Fidelity Contrafund, said unicorns might be "going to lose a bit of luster" due to their more frequent occurrence and several cases of their stock price being devalued.[32] Research by Stanford professors published in 2018 suggests that unicorns are overvalued by an average of 48%.[33][34]

Valuation of high-growth companies

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For high-growth companies looking for the highest valuations possible, it comes down to potential and opportunity. When investors of high-growth companies are deciding on whether they should invest in a company or not, they look for signs of a home run to make exponential returns on their investment along with the right personality that fits the company.[35] To give such high valuations in funding rounds, venture capital firms have to believe in the vision of both the entrepreneur and the company as a whole. They have to believe the company can evolve from its unstable, uncertain present standing into a company that can generate and sustain moderate growth in the future.[25]

Market sizing

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To judge the potential future growth of a company, there needs to be an in-depth analysis of the target market.[25] When a company or investor determines its market size, there are a few steps they need to consider to figure out how large the market really is:[36]

After the market is reasonably estimated, a financial forecast can be made based on the size of the market and how much a company thinks it can grow in a certain time period.

Estimation of finances

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To properly judge the valuation of a company after the revenue forecast is completed, a forecast of the operating margin, analysis of needed capital investments, and return on invested capital needs to be completed to judge the growth and potential return to investors of a company.[25] Assumptions of where a company can grow to needs to be realistic, especially when trying to get venture capital firms to give the valuation a company wants. Venture capitalists know the payout on their investment will not be realized for another five to ten years, and they want to make sure from the start that financial forecasts are realistic.[35]

Valuation methods

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With the financial forecasts set, investors need to know what the company should be valued in the present day. This is where more established valuation methods become more relevant. This includes the three most common valuation methods:[38]

Investors can derive a final valuation from these methods and the amount of capital they offer for a percentage of equity within a company becomes the final valuation for a startup. Competitor financials and past transactions also play an important part when providing a basis for valuing a startup and finding a correct valuation for these companies.

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Sharing economy

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The sharing economy, also known as "collaborative consumption" or "on-demand economy", is based on the concept of sharing personal resources. This trend of sharing resources has made three of the top five largest unicorns (Uber, DiDi, and Airbnb) become the most valuable startups in the world. The economic trends of the 2010s powered consumers to learn to be more conservative with spending and the sharing economy reflected this.[39]

E-commerce

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E-commerce and the innovation of the online marketplace have been slowly taking over the needs for physical locations of store brands. A prime example of this is the decline of malls within the United States, the sales of which declined from $87.46 billion in 2005 to $60.65 billion in 2015.[40] The emergence of e-commerce companies like Amazon and Alibaba (both unicorns before they went public) has decreased the need for physical locations to buy consumer goods. Many large corporations have seen this trend for a while and have tried to adapt to the e-commerce trend. Walmart in 2016 bought Jet.com, an American e-commerce company, for $3.3 billion to try to adapt to consumer preferences.[41]

Innovative business model

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In support of the sharing economy, unicorns and successful startups have built an operating model defined as "network orchestrators".[42] In this business model, there is a network of peers creating value through interaction and sharing. Network orchestrators may sell products/services, collaborate, share reviews, and build relations through their businesses. Examples of network orchestrators include all sharing economy companies, companies that let consumers share information, and peer-to-peer or business-to-person selling platforms.

List of regions by number of unicorns

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The following is a list by Dutch research company dealroom:[43][44]

Tel Aviv center

By absolute numbers

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Ranking

in 2023

Area Unicorns created

since 2019

1 United StatesBay Area 377
2 United StatesNew York City 179
3 IsraelTel Aviv 83
4 United StatesBoston 80
5 United KingdomLondon 69
6 United StatesLos Angeles 64
7 ChinaBeijing 57
8 ChinaShanghai 41
9 FranceParis 36
10 IndiaBengaluru 31
11 United StatesSeattle 29
12 United StatesChicago 28
13 United StatesAustin 24
14 GermanyBerlin 24
15 United StatesSan Diego 23

Per capita

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Unicorns per 1 million people:[44]

Bay area, USA
Ranking

in 2023

Area Unicorns created

since 2019

1 United States Bay Area 48.6
2 IsraelTel Aviv 21.3
3 United StatesBoston 16.3
4 United StatesAustin 10.9
5 United StatesNew York City 9.0
6 United StatesSeattle 7.4
7 United KingdomLondon 7.4
8 United StatesSan Diego 7.0
9 GermanyBerlin 6.0
10 United StatesLos Angeles 4.8
11 IndiaBengaluru 3.0
12 United StatesChicago 2.9
13 FranceParis 2.9
14 ChinaBeijing 2.7
15 ChinaShanghai 1.5
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Minicorn

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A minicorn is a startup with a valuation that exceeds $1 million. These are startups post product-market fit and with substantial revenue growth.[45]

Soonicorn

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A soonicorn is a startup that is growing quickly and has the potential to reach $1 billion valuation in the near future.[46][47][48]

Decacorn

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A decacorn is a startup with a valuation above $10 billion.[49]

Hectocorn

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A hectocorn is a rare term, typically used to describe startups with a valuation above $100 billion.[50]

Camel startups

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Like unicorn, camel is a term commonly used to describe startups.[51][52] The term refers to companies that can survive unfavourable conditions with minimal resource expenditure.[53][54][55][56]

Criticism

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The categorization of startups as unicorns has been subject to criticism. For example, an economic policy focus on enabling more unicorns, as the European Union is striving to do,[57] threatens to lose sight of other societally desirable forms of entrepreneurship.[58]

See also

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References

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  1. ^ Hirst, Scott; Kastiel, Kobi (1 May 2019). "Corporate Governance by Index Exclusion". Boston University Law Review. 99 (3): 1229.
  2. ^ Cristea, Ioana A.; Cahan, Eli M.; Ioannidis, John P. A. (April 2019). "Stealth research: Lack of peer‐reviewed evidence to healthcare unicorns". European Journal of Clinical Investigation. 49 (4): e13072. doi:10.1111/eci.13072. ISSN 0014-2972. PMID 30690709.
  3. ^ Rodriguez, Salvador (3 September 2015). "The Real Reason Everyone Calls Billion-Dollar Startups 'Unicorns'". International Business Times. IBT Media Inc. Retrieved 3 January 2017.
  4. ^ a b Lee, Aileen (2013). "Welcome To The Unicorn Club: Learning From Billion-Dollar Startups". TechCrunch. Retrieved 26 December 2015. 39 companies belong to what we call the 'Unicorn Club' (by our definition, U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors)... about .07 percent of venture-backed consumer and enterprise software startups
  5. ^ Griffith, Erin & Primack, Dan (2015). "The Age of Unicorns". Fortune. Retrieved 26 December 2015. Subtitle: The billion-dollar tech startup was supposed to be the stuff of myth. Now they seem to be... everywhere.
  6. ^ Chohan, Usman (2016). "It's Hard to Hate a Unicorn, Until it Gores You". The Conversation. Retrieved 26 October 2016.
  7. ^ Streitfeld, David (23 January 2023). "For Tech Companies, Years of Easy Money Yield to Hard Times". The New York Times. ISSN 0362-4331. Retrieved 2 August 2023.
  8. ^ a b "The Complete List Of Unicorn Companies". CB Insights. Retrieved 15 November 2024.
  9. ^ "What Is A Decacorn? The Era Of Decacorn Companies". FourWeekMBA. 25 January 2019. Retrieved 29 August 2021.
  10. ^ Sheetz, Michael (25 January 2019). "Elon Musk's SpaceX hits $100 billion valuation after secondary share sale". CNBC. Retrieved 1 July 2022.
  11. ^ Fan, Jennifer S. (March 2016). "Regulating Unicorns: Disclosure and the New Private Economy". BCL Rev. 57 (2): 583, note 1.
  12. ^ "How Unicorns Grow". Harvard Business Review. January–February 2016. pp. 28–30. Retrieved 30 March 2017.
  13. ^ Sumagaysay, Levi (9 October 2018). "Venture capital: Bay Area's Lucid Motors, Zoox, Uber scored the most in third quarter". The Mercury News. San Jose, Calif. Retrieved 15 October 2018.
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  15. ^ Mathur, Priyamvada (6 January 2022). "The meteoric rise of US unicorns in 2021". pitchbook.com. Retrieved 3 July 2022.
  16. ^ "The Complete List Of Unicorn Companies". CB Insights. Retrieved 4 July 2022.
  17. ^ Hackford, Heidi (11 January 2019). "BLITZSCALING: HOW SILICON VALLEY LEARNED TO GROW". computerhistory.org. Retrieved 3 July 2022.
  18. ^ Sterman, J. D., Henderson, R., Beinhocker, E. D., & Newman, L. I. (2007). Getting big too fast: Strategic dynamics with increasing returns and bounded rationality. Management Science, 53(4), 683-696.
  19. ^ Porter, Michael E. (March 2001). "Strategy and the Internet". Harvard Business Review. 79 (3): 62–78, 164. PMID 11246925. Retrieved 3 July 2022.
  20. ^ a b c Howe, Neil. "What's Feeding The Growth Of The Billion-Dollar 'Unicorn' Startups?". Forbes. Retrieved 30 March 2017.
  21. ^ "To fly, to fall, to fly again". The Economist. 25 July 2015. ISSN 0013-0613. Retrieved 30 March 2017.
  22. ^ a b "Grow fast or die slow: Why unicorns are staying private". McKinsey & Company. Retrieved 30 March 2017.
  23. ^ Demos, Telis; Driebusch, Corrie (19 November 2015). "Square's $9-a-Share Price Deals Blow to IPO Market". Wall Street Journal. ISSN 0099-9660. Retrieved 31 March 2017.
  24. ^ Balakrishnan, Anita (16 December 2016). "Trivago IPO opens at $11.20 after pricing at $11, below its expected range". CNBC. Retrieved 31 March 2017.
  25. ^ a b c d "Valuing high-tech companies". McKinsey & Company. Retrieved 30 March 2017.
  26. ^ "Unilever Buys Dollar Shave Club for $1 Billion". Fortune. Retrieved 30 March 2017.
  27. ^ Raice, Shayndi; Ante, Spencer E. (10 April 2012). "Insta-Rich: $1 Billion for Instagram". Wall Street Journal. ISSN 0099-9660. Retrieved 30 March 2017.
  28. ^ Winkler, Rolfe (2015). "Bill Gurley Sees Silicon Valley on a Dangerous Path". The Wall Street Journal. Retrieved 26 December 2015. Subtitle: Subtitle: Venture capitalist says companies hurt themselves by trying to delay going public
  29. ^ Blodget, Henry (2008). "Tech: How To Survive Great Depression 2.0 Without Firing Everyone". Business Insider. Retrieved 26 December 2015. It seems every serious venture capital firm has now had a chat with its portfolio companies about how it[']s time to fire people... VC-extraordinaire Bill Gurley's Benchmark has had the same chat with its companies, but Bill tells peHUB that there's actually an alternative to canning half your company: Move to San Jose
  30. ^ Griffith, Erin (2015). "Bill Gurley Predicts 'Dead Unicorns' in Startup-Land this Year". Fortune. Retrieved 26 December 2015. Subtitle: A crash would affect more than just startups. ... Bill Gurley, the prominent investor behind Uber and Snapchat, has been sounding the tech bubble alarm for months now. He's preached about the dangerous appetite for risk in the market, the alarmingly high burn rates and the excess of capital sloshing around in Silicon Valley. "There is no fear in Silicon Valley right now," he said. "A complete absence of fear." He added that more people are employed by money-losing companies in Silicon Valley than ever before. Will there be a crash? "I do think you'll see some dead unicorns this year," he said, using the term used to describe startups with valuations higher than $1 billion.
  31. ^ Rob Price (2018). "Legendary investor Bill Gurley says that there's a 'systematic problem in Silicon Valley' because it's too easy to get cash". Business Insider. Retrieved 12 March 2018. There's so much easy money in the tech industry, entrepreneurs can afford not to be accountable to their investors. That "excessive amount of money," he says, can inflate a startup's valuation—even if they don't deserve it.
  32. ^ Reuters (01 December 2015). Fidelity star Danoff grows cautious about unicorn phenomenon, CNBC.com, accessed 31 Jan 2020
  33. ^ Gornall and Strebulaev (2018). "Squaring Venture Capital Valuations with Reality". Stanford University Working Paper. SSRN 2955455. We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns—private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuations average 48% above fair value, with 13 being more than 100% above.
  34. ^ Sorkin, Andrew (2017). "How Valuable Is a Unicorn? Maybe Not as Much as It Claims to Be". New York Times. Retrieved 11 March 2018. The average unicorn is worth half the headline price tag that is put out after each new valuation.
  35. ^ a b MacMillan, I. C., Siegel, R., & Narasimha, P. S. (1985). Criteria used by venture capitalists to evaluate new venture proposals. Journal of Business venturing, 1(1), 119-128.
  36. ^ Zhuo, Tx (7 March 2016). "5 Strategies to Effectively Determine Your Market Size". Entrepreneur. Retrieved 30 March 2017.
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  38. ^ "Valuation methods | Venture Valuation". www.venturevaluation.com. Retrieved 30 March 2017.
  39. ^ Newlands, Murray (17 July 2015). "The Sharing Economy: Why it Works and How to Join". Forbes. Retrieved 31 March 2017.
  40. ^ Ho, Ky Trang. "How To Profit From The Death Of Malls In America". Forbes. Archived from the original on 4 December 2016. Retrieved 31 March 2017.
  41. ^ Nassauer, Sarah (8 August 2016). "Wal-Mart to Acquire Jet.com for $3.3 Billion in Cash, Stock". Wall Street Journal. ISSN 0099-9660. Retrieved 31 March 2017.
  42. ^ "Rise of the Unicorns". Zinnov Thoughts. 27 August 2015. Retrieved 1 April 2017.
  43. ^ "Tel Aviv has the fifth most unicorn companies in the world". ctech. 29 March 2023. Retrieved 13 June 2024.
  44. ^ a b Dealroom, 2023 https://dealroom.co/uploaded/2024/03/Tel-Aviv-2024-report-2.pdf?x90202
  45. ^ "Minicorns to Hectocorns: the Stages of Startup". ITEL Learning Systems. 30 March 2023. Retrieved 6 January 2024.
  46. ^ Nayyar, Trisha (28 July 2023). "Here's Everything You Need To Know About A Soonicorn". Inc42 Media. Retrieved 6 January 2024.
  47. ^ "Definition of Soonicorn". Collins Dictionary. 6 January 2024. Retrieved 6 January 2024.
  48. ^ "The 2022 European Unicorn & Soonicorn Report" (PDF). Archived from the original (PDF) on 6 January 2024. Retrieved 6 January 2024.
  49. ^ "Startup Valuations: What are Minicorns, Soonicorns, Unicorns, Decacorns, and Hectocorns". Tech News 180. 14 March 2023. Retrieved 6 January 2024.
  50. ^ Kothari, Maitry (26 September 2023). "Apart from unicorn, what are the different 'corns' of the startup world?". DNA India. Retrieved 6 January 2024.
  51. ^ Lazarow, Alex (7 April 2020). "Forget Unicorns. Startups Should Be Camels". Entrepreneur. Retrieved 28 December 2023.
  52. ^ Lazarow, Alex (16 October 2020). "Startups, It's Time to Think Like Camels". Harvard Business Review. Retrieved 28 December 2023.
  53. ^ "Unicorns är ute – nu letar riskkapitalet efter kameler". Realtid (in Swedish). 29 September 2023. Retrieved 28 December 2023.
  54. ^ "Build a Camel Startup". Toronto Metropolitan University. 2 October 2023. Retrieved 28 December 2023.
  55. ^ Shamia, Gadi (8 November 2022). "Startups Should Forget Aspiring To Be Unicorns—Be Camels Instead". Forbes. Retrieved 28 December 2023.
  56. ^ Snobar, Abdullah (21 February 2023). "Council Post: 2023 Is The Year Of Camel Startups". Forbes. Retrieved 28 December 2023.
  57. ^ "2030 Digital Compass: the European Way for the Digital Decade". European Commission. Retrieved 12 December 2022.
  58. ^ Kuckertz, Andreas; Scheu, Maximilian; Davidsson, Per (2023). "Chasing mythical creatures – A (not-so-sympathetic) critique of entrepreneurship's obsession with unicorn startups". Journal of Business Venturing Insights. 19 (Article e00365): e00365. doi:10.1016/j.jbvi.2022.e00365. S2CID 254432203.
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