There were few, and then there were many.
The unicorn breed of investment has moved from myth to reality in recent years, as economies around the world gain access to economic capital and technology and companies grow larger.
“Unicorn” used to be a title rarely earned by companies, but so many companies have reached the unicorn level of valuation that both journalists and investors have grown wary of the term. But just because a company is a unicorn, does that make it a better investment?
What Is a Unicorn Company?
Coined in 2013 by Venture Capitalist Aileen Lee , the term “unicorn” refers to private companies with a valuation over $1 billion. At the time Lee came up with the term, there were only 39 unicorns in the United States.
It was extremely rare for a private company to grow to that size before holding an IPO. Hence the name unicorn, a very rare and valued creature. Now there are approximately 452 unicorns around the world, with a total valuation of over $1.3 billion.
As unicorns have become commonplace, many more real and mythical creatures have been added to the now-crowded startup zoo. These include:
Companies worth less than $100 million, i.e., very common.
Examples: FBS Data Systems, Henderson
Companies that sprinted to become unicorns.
Examples: Airbnb, Instacart, Zoox, Letgo
Companies that took the longest to become unicorns.
Examples: Vice, Unity, Proteus
Companies that have raised $1 billion or more in funding.
Examples: Ant Financial, Juul, DoorDash
A company that reached the $1 billion valuation but then fell below it. The term has also been used to describe a company that sold or went public below its most recent valuation.
Examples: Uber, Pinterest
Companies with a $10 billion valuation.
Examples: Airbnb, Stripe, GrabTaxi
Companies with a valuation over $100 billion (not necessarily private companies).
Examples: Alphabet, Facebook, Alibaba, Berkshire Hathaway
Canadian companies with a valuation over $1 billion.
Examples: Hootsuite, Element AI, Chinook Therapeutics
Pegasus or Leprechaun
Less official term for $1 billion dollar (or greater) companies that are actually profitable. Pegasus has also been used to refer to companies that make the world a better place and have strong moral standards.
Examples: Facebook and Amazon
The trillionaires. A company that returns an entire fund, meaning the single investment in that company pays off as much as a diversified portfolio of investments. The rarest of creatures.
There are only two examples of companies that have hit the $1 trillion valuation mark, although their valuations have fluctuated since then: Apple and Amazon. Microsoft and Alphabet aren’t far behind.
An acronym describing Real Actual Business Building Interesting Tech.
Examples: This one’s a bit subjective, and the name is mostly making a point about how many tech companies aren’t profitable or don’t have a clear product or business model.
For instance, the blockchain companies that haven’t actually delivered any products or services.
Companies built to survive the apocalypse. Slower growing and more cautious with money and resources.
A dead unicorn. A company previously valued over $1 billion but now worth much less.
Can You Ever Have Too Many Unicorns?
Compared to the 96 new unicorns that appeared in 2017, there were 151 in 2018. This year, there are already more than 40 new unicorns.
The amount of capital invested in unicorns has increased, with over $135 billion invested last year .
There are a few reasons for the growing number of unicorn companies. It used to be the norm for companies to go public in order to bring in sufficient funding to grow their business, but now there is ample private funding available.
Companies are waiting longer and continuing to get investment from venture capitalists (VCs) and private equity into the later stages, rather than go through the risky and complex process of holding an IPO.
Companies are also reaching the $1 billion valuation sooner. In 2015, it took an average of 7.5 years for a company to become a unicorn, but by 2018 the average was down to six years, with some companies reaching unicorn status far quicker.
While this is partly due to the actual growth and potential of these businesses, valuations and funding have also become more generous.
Are Unicorns Really as Valuable as They Appear?
Unicorns are still rare, but perhaps they have become too common. Early-, seed-, and late-stage valuations have jumped significantly in recent years, and current rates of venture capital investment mimic those of the dot com era.
A study from the National Bureau of Economic Research concluded that unicorn startups are 50% overvalued on average . That means that around half of the unicorns should be valued at less than $1 billion.
Founders work with Venture Capitalists to reach unicorn status. Valuations increase as more money is invested into a company.
So when a company reaches the $1 billion valuation mark it is certainly something to pay attention to as an investor, but it doesn’t necessarily mean that the company will succeed. It’s important to look closely at the team, history, and financials of a company before investing in it.
Top 10 Most Valuable Unicorns
The largest percentage of current unicorn companies are in the internet software and services category. Ecommerce and fintech companies also make up a large percentage. Ten years ago, nearly every unicorn company was born in the United States or Europe.
Now, one in three unicorns is coming out of China. China’s services industry has grown, and the influx of private capital into startups has increased valuations worldwide.
Silicon Valley has been the hub of tech companies since the formation of the computer industry, but other cities and countries are now attracting founders and top talent with their more affordable living costs.
We already covered Decacorn companies, so here are the 10 unicorn companies with the highest valuations under $10 billion so far in 2020:
• Coupang—South Korea—$9 billion valuation
• Guazi—China—$9 billion valuation
• Coinbase—United States—$8 billion valuation
• BYJU’S—United States—$8 billion valuation
• Instacart—United States—$7.6 billion valuation
• Robinhood—United States—$7.6 billion valuation
• SenseTime—China—$7.5 billion valuation
• Snapdeal—India—$7 billion valuation
• Roivant Sciences—United States—$7 billion valuation
• Tokopedia—Indonesia—$7 billion valuation
Investing in Unicorns
When a company already has such a high valuation before it even goes public, it may seem daunting as an investor to figure out whether it will continue to grow. This is especially true considering how many companies may be overvalued in today’s markets.
IPOs of highly valued companies such as Uber and Lyft have underperformed, showing that investors are perhaps catching on to the VC valuation game.
However, it is not uncommon for a company’s stock to fluctuate in the months following an IPO. It can take time for the company to readjust and utilize the influx of new investment capital.
Facebook, Square, Google, and Twitter all had tumultuous IPOs, but over time their stocks grew to become very valuable.
One key to successful long-term portfolio-building is portfolio diversification. Combining investments with varied degrees of risk means that you could reap some of the benefits of outlying successes without losing everything.
How do you know whether a unicorn is destined to be a decacorn or a decacorpse? There is no way to know for sure, but there are a number of factors seasoned investors look for when evaluating a stock. These can include:
No matter how great an idea is and how much funding they bring in, there are always competitors. If another company has superior marketing and more users and sales, this may not bode well for a unicorn over time.
On the other hand, if a company has no competition at all, it could be an indicator that there isn’t a market for their product.
Just because a founder has a cool idea and they can build it, doesn’t mean anybody will spend money on it. Steve Jobs famously said, “A lot of times, people don’t know what they want until you show it to them.”
Unfortunately many young entrepreneurs take Jobs, who was already successful when he said that, too literally. If people want a product and are buying it, that’s a pretty clear indicator for potential future success.
Who are the company’s founders, and what is the culture they are creating at their startup? The talent hired by a company and the strength of its team are crucial factors to its success.
Ninety percent of startups fail, and a founder’s personality, lack of focus, and lack of experience can be cited as major reasons why.
With all the press releases, investment meetings, and day-to-day fires to put out, it can be easy for a team to lose track of their most important asset: their customers.
If a company is focused on customer interaction and service and attracting and keeping new customers, that is a likely good sign for investors.
Path to Profitability
Eighty-one percent of companies that held an IPO in 2018 were unprofitable in the previous year.
The last time newly public companies were this unprofitable was in the year 2000 when the dot-com bubble burst.
So why are investors still interested? Investors have become interested in supporting companies with long term potential and a product they believe in. They believe (or hope) that the investment will pay off in the long run.
This may only truly benefit Venture Capitalists and pre-IPO investors, however. As we mentioned, unicorns are created through deals with investors, which can make the shares of early employees and retail investors far less valuable. It could take many years for some unicorns to become profitable, or they may never reach profitability.
When deciding whether to invest in a particular company, it’s important to look at the broader state of the stock market and the industry that company is in.
Although attempting to time the markets isn’t the wisest way to invest, if you see a red flag in the current economy, you may choose to hold off on investing for the time being.
Adding Unicorns to Your Herd of Investments
Whether you’re a new or seasoned investor, figuring out when to buy stocks and which stocks to buy can be time-consuming and challenging.
Unicorn companies have their risks, but adding some of them to your portfolio might be a good way to diversify.
Using SoFi Invest®, you can easily set up automated or active investing accounts to invest in stocks or ETFs. After all, everyone might benefit from a little unicorn dust in their wallets.
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