Generally speaking, a unicorn refers to a start-up company that has attained a $ 1 billion market value as valuated by either a private or public investment firm.
According to experts from the Venture Capital industry, a unicorn is a tech start-up company that has yet to establish a performance record but it has been valuated to be more than $1 billion.
Origin of the term “Unicorn”
The word “unicorn” was first popularized by Aileen Lee, a venture capitalist who is credited for having started Cowboy VC. Cowboy VC is a seed stage venture capital fund firm based in Palo Alto, California. The term came about after Aileen Lee found out that start-ups founded in the 2000s had yet to attain the $1 billion valuation.
By then, there were only 39 start-up companies which had attained the $ 1 billion valuation. Since they were rare, she compared them to a unicorn, a famed mythical creature that appears as a horse with a single pointed and spiraling horn projecting from its forehead.
Aileen Lee also identified that the first unicorns were start-ups founded in the 1990s for example Google which she defined as a super unicorn with a valuation of more than $100 billion. Today, Facebook is identified as the 2000s super unicorn with a valuation of $500 billion at the time of writing.
Why Unicorns Have Experienced Rapid Growth
As said earlier, when the term unicorn was coined by Aileen Lee in 2013, only 39 companies had attained the $1 billion valuation. Since then, the tech industry has experienced a rapid growth in unicorns. Here are the reasons why tech start-ups have experienced rapid growth over the past few years.
- Buyouts – Large public companies in the tech industry usually engage in acquisitions of start-up companies that are currently engaged in developing products or services that align with their overall goals.
Apart from this, the companies also engage in acquisitions to increase their portfolio as well as boosting their business. One of the best examples of a buyout is Facebook’s acquisition of WhatsApp at $ 19 billion in 2014.
- Get Big Fast Strategy – Today, tech start-up companies are expanding at a high rate thanks to large funding rounds. This is done in order to eliminate rival competitors who would otherwise undercut their market share. Thanks to this strategy, tech start-up companies have become attractive to VCs.
Despite this, the problem of long term sustainability looms when it comes to value creation. One of the best examples of a tech start-up company that has utilized the Get Big Fast Strategy is Uber.
- Private status – According to experts in the VC industry, tech start-ups usually take 11 years before they go public in comparison to 4 years before the turn of the millennium (1999). One reason attributed to this change is the availability of private capital from VCs around the world.
As a result, tech start-ups have the opportunity of going through Series A, B and C when it comes to funding. Thanks to these funding rounds, companies don’t have to go through an IPO in order to obtain more capital or increase its valuation.
In case a company is overvalued after maintaining its private status for years, it risks being devalued. For example Square was a company renowned for its mobile payments and financial services. When it came to the IPO, the company was priced below their IPO prices by the market.
Today, experts have attributed the rise of unicorns to a new wave of technologically driven productivity which has been compared to the development of the printing press over 6 centuries ago.
Despite this, experts have made a cautionary note in comparison to the dot com bubble as well as the lack of sustainability on a long term basis.
The good news is that if your tech start-up has a product or service that transcends time and competition, you will survive and get to be valued higher in the IPO.