Unicorn (finance)

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 1,172 unicorns worldwide as of June 2022^[update].^[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]

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^[update], 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.

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]

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.

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]

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]

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]

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]

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]

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]

• Defining the sub-segment of the market (no company can target 100% market share, also known as monopolization)
• Top-Down market sizing^[37]
• Bottom-Up analysis^[37]
• Competitor analysis

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.

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]

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]

• Discounted cash flow analysis
• Market comparable method
• Comparable transactions

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.

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 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]

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.

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

Ranking in 2023	Area	Unicorns created since 2019
1	Bay Area	377
2	New York City	179
3	Tel Aviv	83
4	Boston	80
5	London	69
6	Los Angeles	64
7	Beijing	57
8	Shanghai	41
9	Paris	36
10	Bengaluru	31
11	Seattle	29
12	Chicago	28
13	Austin	24
14	Berlin	24
15	San Diego	23

Unicorns per 1 million people:^[44]

Ranking in 2023	Area	Unicorns created since 2019
1	Bay Area	48.6
2	Tel Aviv	21.3
3	Boston	16.3
4	Austin	10.9
5	New York City	9.0
6	Seattle	7.4
7	London	7.4
8	San Diego	7.0
9	Berlin	6.0
10	Los Angeles	4.8
11	Bengaluru	3.0
12	Chicago	2.9
13	Paris	2.9
14	Beijing	2.7
15	Shanghai	1.5

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]

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]

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

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

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]}

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]

• List of unicorn startup companies
• List of venture capital firms
• First-mover advantage
• Unicorn bubble
• Venture capital financing

• "The Complete List of Unicorn Companies". CB Insights.