What Drives Unicorn Companies to a $1 Billion Valuation? Key Insights

A privately owned company known as a unicorn boasts a market value exceeding $1 billion, yet it remains unlisted on any stock market. This valuation often stems from investors’ expectations during funding rounds, where they focus heavily on a unicorn startup ’s anticipated growth and development, given these companies’ relatively recent inception.

Achieving unicorn status is significant for any new business as it reflects promising growth prospects and substantial capital acquisition. While many unicorns eventually gain recognition, not all sustain their early valuations, with some failing to meet the high expectations.

Origin of the Term Unicorn

The term “unicorn” was first introduced by venture capitalist Aileen Lee in a 2013 TechCrunch article. Her research indicated that a mere 0.07% of software startups in the 2000s achieved a $1 billion valuation. Lee likened these rare successes to the mythical unicorn, highlighting their scarcity.

Lee’s analysis showed that on average, four unicorn startups emerged annually over the previous decade. The standout ‘super unicorn’ was Meta Platforms Inc., which, following its 2012 listing, surpassed a $100 billion valuation. Of approximately 60,000 tech startups during that era, only one in 1,538 reached unicorn status.

Lee also identified that each major technological wave, such as the 1970s personal computer boom and the 1990s internet surge, produced at least one ‘super unicorn.’

Examples of Unicorn Companies

Below are some of the world’s most valuable unicorn startups :

• Didi Chuxing (China) : A car rental firm.
• WeWork (USA) : Coworking space provider.
• Airbnb (USA) : Vacation rental platform.
• SpaceX (USA) : Aerospace transportation firm.
• Stripe (USA) : Facilitates online payments for individuals and businesses.
• Epic Games (USA) : Developer of Fortnite.
• Uber (USA) : A smartphone app for transportation services.

How Do You Build a Unicorn?

To become a unicorn, a company must present a value proposition that transforms lives by solving previously unrecognized problems. Mobile phones exemplify this. Decades ago, landlines sufficed, but the advent of cell phones introduced connectivity convenience.

Once a company offers a novel service, it must continuously innovate. Initial mobile phones primarily enabled calls, but evolving consumer demands led to integrated cameras. Companies failing to adapt risk obsolescence. Therefore, a unicorn’s value proposition must evolve alongside its business environment.

Building a unicorn startup requires identifying target customers who not only purchase products but also advocate for them. Targeting indiscriminately may not justify the investment of time, money, or resources.

Many unicorns emerged after the early 2000s dotcom boom and bust, learning from past failures. Although local economic downturns can pose challenges, some thrive in adversity. Establishing a unicorn company is challenging, with no guaranteed formula for success, and luck often plays a crucial role.

Pros and Cons of Unicorn Companies

Pros

Growing Businesses

Unicorns aim to become profitable, long-lasting companies with significant market influence. They expand rapidly by offering products or services that meet market demands, attracting unicorn investments due to their success. Innovation and leadership drive their sustained growth, positioning them as trendsetters in their respective industries.

Positive Business Outlook

Most unicorns maintain an optimistic outlook and have growth ambitions. They often undergo numerous unicorn investment rounds, fueling expansion. These innovative startups inspire investor confidence. Market demand, industry trends, and sound business strategies contribute to their positive outlook. Many anticipate unicorns to lead their fields and yield substantial investor returns as they mature.

Vetted by Investors

Before achieving unicorn status, professional investors rigorously evaluate these companies. The potential goal for a unicorn is to identify businesses with significant market opportunities and growth potential. Financial experts assess business models, revenue streams, markets, and growth prospects before investing. This thorough scrutiny enhances unicorns’ credibility, attracting major investors. Despite their innovative nature, this process equips unicorns with the necessary skills for competitive success. Expertise from unicorn investment professionals is crucial for navigating competitive markets.

Cons

High-Risk Investments

Investing in unicorn startups is inherently risky, especially for individual investors. These companies often have unstable financials and face higher failure rates compared to established firms. Unicorn investments can be hard to liquidate, posing liquidity challenges if the company underperforms. With limited financial disclosure, assessing their true value and risks can be difficult for investors.

Hard to Invest In

For the average investor, accessing unicorn startups can be challenging. These companies typically receive funding from affluent individuals and major donors, like venture capitalists. Regular investors lack opportunities to invest in private companies not listed on public exchanges, limiting access to fast-growing firms. Consequently, unicorn investments are often restricted to those with private market access or venture capital firm invitations.