How to Spot a Potential Unicorn Company

What is a Unicorn Company?

“Unicorn” is a term used to describe a private company that has achieved a valuation of $1 billion or greater. Other variants include the “decacorn” (companies valued at over $10B billion) and “hectocorn” (companies valued at over $100 billion).

Aileen Lee, founder of Cowboy Ventures, coined the term “unicorn” in 2013 in a TechCrunch piece titled Welcome To The Unicorn Club: Learning From Billion-Dollar Startups.” In the article, she describes the impetus for billion-dollar exits, what makes a unicorn, as well as the likelihood of startups to achieve the coveted status of unicorn.

Notably, the unicorn ecosystem has changed significantly since the publication of this piece. While still uncommon, it is less rare now for companies to reach and surpass billion-dollar valuations than it was in 2013, with 435 total unicorns globally to date.

There is no way to know with any certainty whether or not a startup will reach unicorn status. And even if a startup does become a unicorn, there’s no guarantee that it will create value. That said, there are certain traits many unicorns share that differentiate them from other startups.

How are Unicorns Valued?

Startup valuations are not an exact science. In the early stages especially, valuation numbers are highly subjective. Founders often overvalue their company, while investors often undervalue it. High level, a startup’s valuation is determined by weighing growth opportunities and long-term development potential in the market.

Outside of what the company is doing itself, there are typically two routes a company can take to increase its valuation:

  1. Raising capital from investors through a series of funding rounds, or
  2. Getting acquired by another company

An important caveat to be aware of here is that valuation may not be reflective of actual performance. And in emerging industries especially, it can be difficult to gauge a company’s value, as there could be little to compare it to.

Identifying a Potential Unicorn

With that caveat in mind, let’s jump into a few important traits many unicorns share. While these commonalities are certainly not absolutes, they are worth noting.

Privately Held

Unicorns are typically privately held companies that get capital by raising additional rounds of funding from venture capital or private equity firms. This enables them to remain private for longer, which means these companies can potentially rack up massive valuations from investors without ever setting foot on the public market.

Disruptively Innovative

Another major unicorn calling card is its ability to disrupt incumbent industries or big market players. A recent example of this is Robinhood’s fee-free trading. By offering users commission-free trading, Robinhood pushed industry incumbents like Charles Schwab and TD Ameritrade to alter their fee structure to better compete.

First-Mover’s Advantage

While it’s not always the case, many unicorns are the first to get their idea to market. This means they have a natural advantage in terms of infrastructure and product offerings over imitators that may come along later.

Focus on Tech

In order to draw in the kind of investment needed to reach unicorn status, companies must be constantly innovating to keep up with our rapidly changing tech space. Whether it’s B2B or B2C, new technological advancements have become intrinsic to market disruption.

Global Market Opportunity

The potential market opportunity for unicorns is usually global, which can offer the potential for rapid growth. A good way to spot a company who is rising in the ranks is the rate at which it acquires new users. A high growth rate is can indicate that a company is on its way to a higher valuation.

Take Caution

As mentioned earlier, valuation is not always directly tied to the actual performance of a company. Some companies may reach the level of unicorn without ever generating any value for their investors, and the rise and fall of unicorns such as uBiome, MoviePass, Theranos, serve as cautionary tales for investors who are swayed by lofty valuations.

The unicorn space is still a relatively new frontier that has evolved significantly in just the past seven years, and we expect it will continue to change as the new decade unfolds. The best advice we can give is to take unicorn valuations with a grain of salt, and instead focus on a company’s long-term potential.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.





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