What Are Unicorn Companies?
Unicorns are private companies with valuations of $1 billion or more. The termwas coined by venture capitalist Aileen Lee in her 2013 piece “Welcome to theUnicorn Club : Learning From Billion-Dollar Startups.” She used the word“unicorn” in order to convey the rarity and magical qualities of startups thathit the $1-billion mark.When Lee came up with the term, she counted only 39 unicorns in the U.S. Itwas still considered exceptional for a private company to grow to that sizewithout having an initial public offering or IPO.Nowadays, a combination of trends–companies staying private longer, widespreadtechnological changes, and abundant money sloshing around in capitalmarkets–has led to the creation of numerous unicorns. As of April 2021, thereare 642 unicorns worldwide, with a cumulative valuation of $2.15 trillion,according to research by CB Insights , a business analytics platform.Unicorns can be eye-catching and exciting for investors because some representrapid–even seemingly miraculous–growth. But are unicorns actually goodinvestments? It’s important for investors to remember that these companieshaven’t yet come under the scrutiny of public markets.Here’s a closer look at how to weigh unicorn companies as investments.
Unicorns by Industry
According to Embroker, an insurance brokerage, the bulk of unicorns come fromseven sectors: e-commerce, fintech, internet software, on demand, healthcare,travel technology, and education technology.
Why Are There So Many Unicorns?
There are several reasons behind the proliferation of unicorn companies. Hereare a couple.1. Expansion of Private Markets: As mentioned above, companies are waitinglonger before they go public. Part of the reason for that has been thatprivate investments have exploded. Startups can continue to get investmentsfrom venture-capital firms (VCs) and private-equity funds in their laterstages, and some prefer that option over the risky, complex process of havingan IPO.2. Sweeping Technological Change: Significant innovations–such as the rise ofsocial media, smartphones and cloud computing–fueled growth in many unicorns.As Aileen Lee noted, the iPhone debuted in 2007, while the first Android hitthe market in 2008. These events led to businesses that operate mobile apps orcapitalize on smartphones to drive up sales.3. Well-Funded Capital Markets: Since the 2008-2009 financial crisis, growthin the economy has been sluggish. That’s meant central banks worldwide havekept monetary policies easy, injecting capital into markets that have foundtheir way into fledgling companies. Meanwhile, tech investing has been one ofthe few bright spots for investors hungry for growth opportunities, driving upstartup valuations.
How Do Unicorns Get Valued?
Many startups–even ones of unicorn size–are unprofitable. Investors put inmoney under the assumption that profits will eventually come, and that’s whybusinesses may rely on longer-term forecasting. Similar to how it works whenit comes to growth vs. value stocks, valuation metrics like price-to-salesratios may be used in order to measure the company’s worth.Investors may also come up with valuations by comparing unlisted firms withsimilar businesses that are publicly traded. Hence, a rising stock market mayalso lead to higher valuations for privately held companies.However, an academic study updated in January 2020 concluded that out of 135venture-backed unicorns, 48% were overvalued on average, with 14 being 100%above fair value. That means around half of these supposed unicorns aren’tactually unicorns.
How to Invest in Unicorns
Accredited investors–those with $200,000 in annual income or $1 million inassets–can get exposure to unicorns by putting money into venture-capitalfunds–capital pools that invest in private companies. In recent years, becauseof the soaring success of some unicorns, they’ve attracted not just venture-capitalists, but also hedge funds, asset-management firms like mutual funds aswell as sovereign wealth funds.When it comes to exiting unicorn investments, a 2020 Crunchbase articlepointed out that the majority of unicorns–two-thirds over a five-yearperiod–conducted an IPO–giving their investors the opportunity to cash out.But in 2020, the majority of unicorn exits have been through acquisitions.
Alternative to Unicorns in Startup Terminology
The surge in private-market tech investing has led to a new vernacular that’sspecific to startup valuations. Here’s a table that covers some popular lingo.
While they started out as rarities, unicorns have since multiplied. And now aherd founded over the past decade is headed for the stock market.For investors, unicorn companies may appear to be a good way to diversify andget access to a high-growth business. But it’s important to remember that manyunicorns are unprofitable businesses that secure $1-billion valuations bymaking very long-term projections. Plus, financial information isn’t asreadily available as for a company that’s already listed.It’s important to look closely at a new company’s management team, history, aswell as financials before investing in it. Whether you’re a new or seasonedinvestor, researching which stocks to buy and when to buy them can be time-consuming and challenging.With SoFi Invest®, investors get access to educational resources and financialadvisors. They can also Buy Pre-IPO Stock, ETFs, and fractional shares withoutany commission fees. All investors have to do is set up an Active Investingaccount for as little as $5.Download the SoFi Invest app today.* * * SoFi Invest® The information provided is not meant to provide investment or financialadvice. Investment decisions should be based on an individual’s specificfinancial needs, goals and risk profile. SoFi can’t guarantee future financialperformance. Advisory services offered through SoFi Wealth, LLC. SoFiSecurities, LLC, member FINRA / SIPC . SoFi Invest refers to the threeinvestment and trading platforms operated by Social Finance, Inc. and itsaffiliates (described below). Individual customer accounts may be subject tothe terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFiWealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerageservices are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliatedSEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities). 2) Active Investing—The Active Investing platform is owned by SoFi SecuritiesLLC. Clearing and custody of all securities are provided by APEX ClearingCorporation. 3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registeredMoney Service Business. For additional disclosures related to the SoFi Invest platforms describedabove, including state licensure of Sofi Digital Assets, LLC, please visitwww.sofi.com/legal. Neither the Investment Advisor Representatives of SoFiWealth, nor the Registered Representatives of SoFi Securities are compensatedfor the sale of any product or service sold through any SoFi Invest platform.Information related to lending products contained herein should not beconstrued as an offer or pre-qualification for any loan product offered bySoFi Lending Corp and/or its affiliates. IPOs: Investing early in IPO stock involves substantial risk of loss. Thedecision to invest should always be made as part of a comprehensive financialplan taking individual circumstances and risk appetites into account. Third Party Brand Mentions: No brands or products mentioned are affiliatedwith SoFi, nor do they endorse or sponsor this article. Third party trademarksreferenced herein are property of their respective owners. External Websites: The information and analysis provided through hyperlinks tothird party websites, while believed to be accurate, cannot be guaranteed bySoFi. Links are provided for informational purposes and should not be viewedas an endorsement. Investment Risk: Diversification can help reduce some investment risk. Itcannot guarantee profit, or fully protect in a down market.SOIN19123 What Is a Unicorn Tech Startup Company – Status Meaning & ExamplesYou’ve likely come across the term “unicorn” when digging into new investmentopportunities. Likened to the legendary creature often depicted as a rainbow-colored horse with a golden horn, unicorn companies sound like rare, mythicalbeasts.These companies are indeed rare and can be difficult to find, yet many havemassive followings behind them. The allure of finding a unicorn often drivesinvestors to dive in as soon as they see one for fear of missing out on a rareopportunity. But is that really a good idea?What are unicorn companies? Are they worth your hard-earned investmentdollars?
What Are Unicorn Companies?
The term unicorn company is used to describe a privately held or startupcompany with a valuation of more than $1 billion. Seems simple enough right?So, why is it that unicorn companies are so hard to find?Because it is incredibly rare for a company to reach a valuation of more than$1 billion without the help of the public markets. For this to happen, one oftwo things has to be true: 1. A privately held company has generated such strong sales that a valuation of $1 billion or more is justified by this incredible performance. 2. A startup company has an idea that’s so innovative that even the experts are willing to throw caution to the wind for a chance to get involved in what may become revolutionary technology.That doesn’t happen often.Venture capitalist Aileen Lee, who coined the term, described four maincategories of unicorn companies, which include consumer audience, e-commerce,software-as-a-service, and enterprise software. Her research showed that thevast majority of unicorn companies were split relatively evenly across thesefour key business models.* * *
Where Did the Term Unicorn Company Come From?
In her now-famous 2013 TechCrunch article that popularized the term unicorncompany, Lee explained that on average since 2003, only four unicorn companiesare born each year in the United States. Only 0.07% of U.S. venture-backedsoftware startups reach a $1 billion valuation.That’s a huge statement that goes to show just how difficult finding thesecompanies can be. The means just seven of every 100,000 tech startups willever find their way to a billion-dollar valuation. Most of the few that evermake it to that point will do so over time, not in the startup phase.So, unicorn companies are incredibly rare exceptions, reaching that prizedbillion-dollar valuation while still in the startup or privately held stage.They are so rare that an elusive, mythical creature seemed like an appropriateway to name the group.* * *
Examples of Unicorn Companies
Keep in mind that unicorn companies are startup companies that have grown tobe worth more than $1 billion. That’s exceptionally rare, but it does happen.According to CBInsights, there are currently more than 400 unicorn companiesin existence today around the world, including many in the U.S. and China andseveral in India, Germany, South Korea, and the United Kingdom. Some unicorncompanies that you may have heard of include: * Airbnb. Founded in 2008, Airbnb quickly grew to become the online vacation rentals hotspot. The application gives homeowners a way to earn money from investment properties or their own homes when they are traveling, and gives travelers a wide array of lower cost, higher value options for rentals during their vacations or work trips. The company is currently planning an initial public offering (IPO) and has been privately valued at $31 billion according to The New York Times. * Epic Games. Epic Games is the creator of the smash hit video game Fortnite. The company has also seen success with its titles Infinity Blade and Unreal Tournament. Epic Games reached a valuation of more than $17 billion long before any plans of an IPO. * DoorDash. Finally, DoorDash is a food delivery service that adds a delivery component to restaurants that didn’t previously offer the service. The move proved to be a great idea, resulting in a startup company with a value of more than $13 billion and that has reached as high as $16 billion.One similarity you’ll notice among all of these companies — other than thefact that they have tremendously high valuations — is the fact that they areall in technology. Looking at the full list of unicorn companies onCBInsights, you’ll find that nine of the top 10 unicorn companies by valuationare centered around innovative technology in one way or another.Pro tip: If you’re thinking about adding a unicorn company to your portfolioafter they go public, make sure you do your due diligence. Stock screenerslike Trade Ideas can help you narrow down the choices to companies that meetyour requirements. Learn more about our favorite stock screeners.* * *
Investing in Unicorn Companies Pros & Cons
As with an investment in any other type of company, making an investment in aunicorn company comes with pros and cons.
Pros of Investing in Unicorns
There are several benefits to investing in unicorn companies. Some of the mostimpressive of these benefits include: 1. You Likely Know the Company. Unicorn companies don’t grow to billion dollar valuations before their IPO without a reason for that valuation. These companies have created something highly innovative. If the product they’ve created is on the market, it is likely a very popular one. If it hasn’t hit the market yet, a large audience likely already knows it’s coming. Think about it, Airbnb hasn’t yet gone public, but if you haven’t heard the name, chances are that you live under a rock. There’s a strategic benefit to investing in companies that you have heard of and know well. Remember, educated investing gives the investor a better chance of seeing growth. 2. Some Unicorns Really Do Fly. As their namesake mythical creatures do, some unicorn companies fly following their IPO. A great example of a successful unicorn company is Zoom. The stock debuted at just $32 per share. One year later, the stock was trading at well above $100 per share. 3. Innovation Has Long-Term Value. Unicorn companies are the kings of innovation, and there’s tremendous value in that. Those that do hit tend to hit hard, generating tremendous long-term profits. Take a look at Tesla. After launching a unicorn IPO at $17 per share in 2010, the stock has never fallen below its IPO price. Just 10 years later, the stock has multiplied more than 100 times.
Should You Invest in Unicorn Companies?
Unicorn companies are exciting for investors because of the significant gainsthat they can create. However, any time there is an opportunity forsignificant gains, there’s also the opportunity for significant losses.Investments in unicorn companies are highly speculative. This means that theseinvestments are made under the speculation that an innovative technology willbe a game-changer in a specific sector. Unfortunately, unless you’re a fortuneteller, there’s no way to say that for certain.Just like any other company, unicorn companies can do belly flops, and due totheir overwhelmingly high early valuations, their belly flops have a tendencyto be incredibly painful. So, it takes a special kind of investor to invest inthese types of stocks.In particular, if you’re an investor with a heavy risk appetite, a strongunderstanding for technology and the implications of new and innovativetechnology, and the ability to take on losses and absorb them without losingyour livelihood, unicorn stocks may be for you. On the other hand, if you’renot comfortable with risk and don’t have money to lose in the stock market,this is a category of stock that you should stay away from.* * *