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What Are Unicorn Companies?

By Inyoung Hwang · April 20, 2021 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Are Unicorn Companies?

Unicorns are private companies with valuations of $1 billion or more. The term was coined by venture capitalist Aileen Lee in her 2013 piece “Welcome to the Unicorn Club : Learning From Billion-Dollar Startups.” She used the word “unicorn” in order to convey the rarity and magical qualities of startups that hit the $1-billion mark.

When Lee came up with the term, she counted only 39 unicorns in the U.S. It was still considered exceptional for a private company to grow to that size without having an initial public offering or IPO.

Nowadays, a combination of trends–companies staying private longer, widespread technological changes, and abundant money sloshing around in capital markets–has led to the creation of numerous unicorns. As of April 2021, there are 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 represent rapid–even seemingly miraculous–growth. But are unicorns actually good investments? It’s important for investors to remember that these companies haven’t yet come under the scrutiny of public markets.

Here’s a closer look at how to weigh unicorn companies as investments.

Top 10 Most Valuable Unicorns

Below is a chart of the unicorn companies with the highest valuations, according to CB Insights.

Company

Valuation

Date Added

Country

Industry

Bytedance $140 billion 4/7/2017 China A.I.
Stripe $95 billion 1/23/2014 U.S. Fintech
SpaceX $74 billion 12/1/2012 U.S. Space
Didi Chuxing $62 billion 3/31/2015 China Auto
Instacart $39 billion 12/30/2014 U.S. Delivery
UiPath $35 billion 3/2/2018 U.S. A.I.
Klarna $31 billion 12/12/2011 Sweden Fintech
Rivian $27.6 billion 9/10/2019 U.S. Auto
Nubank $25 billion 3/1/2018 Brazil Fintech

Source: CB Insights

Characteristics of Unicorn Companies

The rapid increase in the number of unicorns has meant that these companies come from a range of industries and geographics. Answers to questions like ‘How old are these companies?’ and ‘Who are the founders?’ have also started to vary. Let’s look at some broad-stroke trends.

Unicorns by Industry

According to Embroker, an insurance brokerage, the bulk of unicorns come from seven sectors: e-commerce, fintech, internet software, on demand, healthcare, travel technology, and education technology.

Unicorns by Geography

While San Francisco’s Silicon Valley is still synonymous with startups, a greater number of unicorn businesses have sprung from elsewhere.

Cities Home to Most Unicorns, as of July 2020

City

Number of Unicorns

San Francisco 64
Beijing 51
New York 34
Shanghai 27
London 15
Hangzhou 13
Shenzhen 13
Boston 10

Source: Statista, CB Insights

Countries Home to Most Unicorns, as of June 2020

Country

Number of Unicorns

U.S. 228
China 122
U.K. 25
India 21
Germany 13
South Korea 10
Brazil 7
Israel 7

Source: Statista, CB Insights

Other Traits of Unicorns

Lately, U.S. unicorns have tended to be older when they enter the stock market. When Aileen Lee coined the term in 2013, the median age of a tech IPO company was nine years, data from University of Florida professor Jay Ritter show. Going back further in time, during the height of the dot-com bubble in 1999, the median age was four years. Fast forward to 2020, and the median age has jumped to 12.5 years.

When it comes to finding profitable businesses, the number has dwindled. In 2010, 64% of tech companies debuting in the stock market were profitable. In 2020, the percentage has sunk to 19%. For context, again looking back at the tech-bubble era, in 1999 and 2000, just 14% of tech IPOs were by profitable companies.

When it comes to who’s founding these unicorns, there has been some increase in diversity. When Lee did the research for her article, she found no unicorns had female founding CEOs. However, by 2019, 21 startups founded or co-founded by a female became unicorns, according to business publications.

Why Are There So Many Unicorns?

There are several reasons behind the proliferation of unicorn companies. Here are a couple.

1. Expansion of Private Markets: As mentioned above, companies are waiting longer before they go public. Part of the reason for that has been that private investments have exploded. Startups can continue to get investments from venture-capital firms (VCs) and private-equity funds in their later stages, and some prefer that option over the risky, complex process of having an IPO.

2. Sweeping Technological Change: Significant innovations–such as the rise of social media, smartphones and cloud computing–fueled growth in many unicorns. As Aileen Lee noted, the iPhone debuted in 2007, while the first Android hit the market in 2008. These events led to businesses that operate mobile apps or capitalize on smartphones to drive up sales.

3. Well-Funded Capital Markets: Since the 2008-2009 financial crisis, growth in the economy has been sluggish. That’s meant central banks worldwide have kept monetary policies easy, injecting capital into markets that have found their way into fledgling companies. Meanwhile, tech investing has been one of the few bright spots for investors hungry for growth opportunities, driving up startup valuations.

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How Do Unicorns Get Valued?

Many startups–even ones of unicorn size–are unprofitable. Investors put in money under the assumption that profits will eventually come, and that’s why businesses may rely on longer-term forecasting. Similar to how it works when it comes to growth vs. value stocks, valuation metrics like price-to-sales ratios may be used in order to measure the company’s worth.

Investors may also come up with valuations by comparing unlisted firms with similar businesses that are publicly traded. Hence, a rising stock market may also lead to higher valuations for privately held companies.

However, an academic study updated in January 2020 concluded that out of 135 venture-backed unicorns, 48% were overvalued on average, with 14 being 100% above fair value. That means around half of these supposed unicorns aren’t actually unicorns.

How to Invest in Unicorns

Accredited investors–those with $200,000 in annual income or $1 million in assets–can get exposure to unicorns by putting money into venture-capital funds–capital pools that invest in private companies. In recent years, because of the soaring success of some unicorns, they’ve attracted not just venture-capitalists, but also hedge funds, asset-management firms like mutual funds as well as sovereign wealth funds.

When it comes to exiting unicorn investments, a 2020 Crunchbase article pointed out that the majority of unicorns–two-thirds over a five-year period–conducted an IPO–giving their investors the opportunity to cash out. But in 2020, the majority of unicorn exits have been through acquisitions.

Can Average Investors Invest in Unicorns?

Unicorns don’t generally accept modest investments from individual or retail investors.

Jay Clayton, former chairman of the Securities and Exchange Commission, argued that smaller investors should get access to private-market investments. The fact that companies are staying private for longer has also made it true that individual investors are missing out more on businesses in their early stages.

But skeptics say private markets don’t have the same disclosure requirements that public markets require, a situation that could leave retail investors in the dark about a company’s financials and increase the risk of fraud. Mutual funds can put up to 15% of assets in illiquid assets, but often they don’t allocate that much to private companies since these investments are tougher to sell.

Deep-pocketed retail investors can get in early with some startups via angel investing–when individuals provide funding to very young businesses. But these businesses tend to have valuations nowhere near $1 billion.

However, the definition of who’s an accredited investor hasn’t been updated since 1982. The $200,000 annual income requirement translates to $538,000 today, while the $1 million net-worth requirement now equals $2.7 million. That’s meant the number of accredited investors has jumped from 1.6% of U.S. households to 13%. So technically, these households could qualify for venture-capital funds and get exposure to unicorns.

Risks of Investing in Unicorns

Not all unicorns successfully transition into stock-market stars. Some see their valuations dip in late private funding rounds. Some have even scrapped IPO plans at the last minute. Others disappoint after their debut in the public markets, finding that first-day pop in trading elusive or underperforming in the weeks after the IPO.

How do you know whether a unicorn is destined to be the next market darling or flame-out? There is no way to know for sure, but there are a number of risks when it comes to unicorn investing. Here are some:

•   Lack of Profitability: Many unicorns offer deeply discounted services in order to supercharge growth. While venture capitals are used to subsidizing startups, public market investors may be tougher on unprofitable businesses.
•   Market Competition: No matter how great an idea is and how much funding they bring in, there are always competitors. If another company has superior marketing, more users and higher sales, this may not bode well for a unicorn.
•   Consumer/Business Need: Just because a founder has a cool idea and they can build it, doesn’t mean anybody will spend money on it. ”
•   Management Team: Who are the company’s founders, and what is the culture they are creating at their startup? Many startups fail, and a founder’s management style and lack of experience can be cited as major reasons why.
•   Regulatory Changes: Some unicorns represent new business models or disrupt existing industries. Such changes may come with regulatory oversight that makes operating difficult.

Alternative to Unicorns in Startup Terminology

The surge in private-market tech investing has led to a new vernacular that’s specific to startup valuations. Here’s a table that covers some popular lingo.

List of Unicorn Terminology

Startup Term

Definition

Pony Company worth less than $100 million
Racehorse Company that became unicorns very quickly
Unitortoise Company that took a long time to become a unicorn
Narwhal Canadian company with a valuation of at least $1 billion
Minotaur Company that has raised $1 billion or more in funding
Undercorn Company that reached a $1 billion valuation then fell below it
Decacorn Company with a valuation of at least $10 billion
Hectocorn Company with a valuation of at least $100 billion
Dragon Company that returns an entire fund, meaning the single investment paid off as much as a diversified portfolio

The Takeaway

While they started out as rarities, unicorns have since multiplied. And now a herd founded over the past decade is headed for the stock market.

For investors, unicorn companies may appear to be a good way to diversify and get access to a high-growth business. But it’s important to remember that many unicorns are unprofitable businesses that secure $1-billion valuations by making very long-term projections. Plus, financial information isn’t as readily available as for a company that’s already listed.

It’s important to look closely at a new company’s management team, history, as well as financials before investing in it. Whether you’re a new or seasoned investor, 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 financial advisors. They can also Buy Pre-IPO Stock, ETFs, and fractional shares without any commission fees. All investors have to do is set up an Active Investing account for as little as $5.

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