Venture: What it takes to be a Unicorn

Jamel Toppin/The Forbes Collection

Every year companies are held to a high standard of performing and are given a fiscal evaluation. In order to be a unicorn startup you need to be valued at over $1 billion. This term “Unicorn Startup” was coined by venture capitalist Aileen Lee, and by choosing such a mythical animal to display the true rarity of such a successful company.

Aileen Lee first wrote about unicorns in a article, “ Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.” Aileen first started this search in the early 2000s where she saw that only 0.7% of startups ever reach a $1 billion valuation. With some of the first Unicorns being founded in the early 1990s such as Google and then Facebook.

Most of these startups are going to be tech startups because many investors see these companies as unstoppable with no real ceiling to how much they can do. Whether it be mobile, information or software tech they all simmer down to the fact they have shaky fundamentals and the financing behind them is all contingent on if they are able to deliver on what they are promising.

There are many theories that answer the question of why suddenly there is a rise in the number of Unicorn startups. It could be the technology sector Unicorns reflate of the dotcom bubble of the late 1990s. Others believe that reflects a new wave of technologically driven productivity that is going to change the world forever. Correlating these modern technology expansions to what the industrial revolution was. As we are now encompassing a new age of technology investors jump at the chance of investing their money into the next big thing with the fear that they will miss out. Many people remember when companies like Google and Facebook first went public and how they wish they had invested in the early stages.

Current Unicorns and Why

According to CB Insights there are currently 452 Unicorn companies with a combined value around 1.3 trillion, which is roughly the same valuation of the largest listed company in the US; Apple.

This number of 452 is growing by the month as the number of private companies are holding out to go public. When companies are holding out becoming public it makes the companies more desirable and shows to investors that they will be able to withstand economic downturn and be even more successful when the economy is recovered. In 2013 there were only 39 reported with a growth rate of about 4 per year. Now we are seeing unprecedented growth in this sector and the growth factor has grown exponentially.

Depending on where you get your information it will vary on the number of Unicorn companies that are said to be out there. This is due to the uncertainty of what a company is valued out. The value of Unicorn company is calculated based on its most recent round of funding.  For example if a venture capitalist puts $100 million into a business in exchange for 5% equity, they have been valued at $2 billion.

It is a little different when it comes to new companies, whereas in established companies there are some assets that can be valued. A new company may have little to no assets and they are solely valued for what they are worth based off their potential. It is rare that these companies are valued at what they are in their current state, it is always a future valuation. This is one of the reasons why it makes it difficult for investors to put money into these companies. Like any investing it is always a gamble so there is no guarantee that these companies will always be successful.

Current the highest valued Unicorn is Bytedance where is valuation is listed at a whopping $75 billion. A company like this is listed in a subcategory of Unicorns known as decacorn or a company valued at over $10 billion.

Bytedance is famous for running the well-known app TikTok, which is currently under heavy scrutiny. Even with all the backlash that this app has been receiving over the past couple of months the company is still valued very high. The numbers that are thrown around are so astronomically high that it is near crazy to think that if a company like this were ever to go public the impact that it would have.

Below Bytedance there are some well know companies such as Airbnb, SpaceX and Robinhood. These companies are also very well known in the world and are in the tech sector. Airbnb listed a month ago that they are planning to go public within the month. A company valued this large will have a major impact on the markets and will allow for shifts in how other Unicorns are going to be valued.

How to Become One

I am sure a lot are wondering how a company becomes one of these magical creatures. Like any good company it starts with an idea and the passion to succeed. From there the company needs rapid growth that is going to disrupt the market. Being able to make a splash and really get your company out into the public is key, the more people that know the better.

Next is building the right product that will appeal to a big enough market. There is always a better way to do something, just figuring out how to make whatever is out there better than the last product. For example, the online trading platform Robinhood came into the market in 2013, so most would think that they are late to the game of being a brokerage firm but they are part of the Unicorn group. They are starting to beat out established brokerage firms like E-Trade and TD Ameritrade by adapting to the times and being able to give the consumer what they want.

Third, being able to secure the right investment to make sure that you can apply the right type of growth for the company. Many investors eyes glow up to the idea of investing into a tech company, so it is crucial that the product is brought to the right group of people who will understand the companies mission.

Lastly is making sure that you are going to scale to a large group of consumers. Many of these Unicorn companies tend to take off like rockets when they get the right type of investing. This means that the not only does the tech have to be to handle a larger volume but the company needs to be prepared to work for what is to come.