Telling the truth about SME life today

What Is A Unicorn Company?

If you are new to the term “unicorn company” then you’re in the right place. A typical definition of a unicorn company is one which is valued at more than $1 billion dollars. While this is a broad and average definition of the term, there’s more to it than money. 

When most people hear the word unicorn they immediately think of a mythical one-horned horse from folklore, but in business, the name means something very different.

In this article we take a closer look at unicorns in the context of the financial sector and explore the defining characteristics for unicorn companies

What is the Definition of a Unicorn Company?

It’s fair to say that unicorn companies, just like their mythical counterparts, are a rarity. Unicorn companies are private businesses that have achieved a one billion dollar valuation, but are yet to be listed on the stock market. The companies are still owned by private investors and venture capitalists. In recent times, these companies have emerged from tech.

Since the advent of the internet there has been an increase in start-up businesses, and in recent decades, these have boomed. The term unicorn company was coined in 2013 by Aillen Lee in an article called “Welcome to the Unicorn Club: Learning from Billion-Dollar Start-ups.” She states that unicorn companies are as hard to find as the mythical creature.

What are the Characteristics of a Unicorn Company?

Unicorn companies have some defining characteristics that set them apart from conventional start-ups. For one thing, they offer a product of service which is so innovative that it disrupts the industry and makes waves. The companies then grow quickly outperforming competitors.

Unicorn companies must have more than just an idea, they also have the determination and resources to scale fast from start-up status to billion-dollar organisation. When successful, due to early innovation and growth, it’s often easier for them to attract new investors.

How Common are Unicorn Companies?

While unicorn organisations are not common there are more visible now than when the term was first coined in 2013. In her article, Aileen Lee suggested there were 39 global unicorn companies at the time. These included Facebook, Twitter, LinkedIn, and other tech services. In 2021, it was estimated by Pitchbook Data Inc, there were 580 unicorn firms.

Due to the increase in unicorn companies, new concepts have arrived for companies valued at more than $100 billion. These are referred to as “hectocorn” and “decacorn” for businesses valued at $10 billion.

How does a Company Reach a Billion Dollar Valuation?

Every company has a valuation based on its current profits and future projections. A unicorn company is no different. In order to reach unicorn status, a company needs to be valued at $1 billion. If this status is achieved, it will have a healthy cash flow, potential profits, and demonstrable return on capital investments.

What are the Benefits of Being a Unicorn Company?

Unicorn companies are fortunate in many ways. Not only do they enjoy faster than average growth, but the growth doesn’t go unnoticed. These companies receive more media attention which serves to attract more investment and landing top talent, leading to increased growth.

Unicorn companies are something of a self-fulfilling prophecy that takes a business to the heights of wealth and success. Based on innovative foundations, these companies attract the interest and investment of leading players in the industry supporting growth and success.

Unicorn companies also have greater growth potential since they have the resources and visibility to access untapped markets and scale in ways that outperform the nearest rivals. Thanks to these advantages, new investors regard the business as lower risk and invest.

Ownership & Finances

Since one of the main criteria of a unicorn company is the ownership style–they are still in private ownership–these companies don’t have to answer to shareholders or investors. They have the freedom to make their own decisions to grow the business. Again, this is another attractive prospect to investors who can exert influence on the direction of the company.

Unicorn companies also benefit from avoiding some regulator standards thanks to their legal business status. For instance, a unicorn company doesn’t need to disclose statements to the Securities and Exchange Commission (SEC) in the USA, or the Financial Conduct Authority (FSC) in the UK.

That said, unicorn companies are still subject to the accounting principles and must submit reports to the GAAP. They still enjoy far less financial regulation and accountability than conventional businesses. For this reason, it can be hard for near rivals to be competitive.

What are Some Well-Known Unicorn Companies?

When the term unicorn company was initially coined back in 2013 there were 3-4 unicorn companies. Since then, the number has grown dramatically, and now there are over 1100 unicorn companies around the world.

Some of the most well known are:

1. ByteDance

Everyone has heard of Tik-Tok but not everyone has heard of its parent platform, Bytedance. The Chinese-owned company is thought to be the largest unicorn company in the world, valued at a staggering $300 billion.

In recent years the valuation is thought to be even higher ($400 billion), however, it experienced a dramatic fall after its initial public offering. In 2022 many investors cashed out losing confidence in the growth potential of ByteDance.

2. SpaceX

SpaceX is a well-known space exploration company thanks to the outspoken company founder Elon Musk. Space X is determined to make humanity a space faring planet with its innovative rockets and deep space missions:

It also aims to make space travel affordable for tourists. Space X is a fascinating and innovative company which rose to prominence quickly and is classed as a unicorn company with a current value of $127 billion.

3. SHEIN

Known for its affordable and appealing clothes, SHEIN is a fast-fashion company that ships clothing and accessories around the world. SHEIN offers a wide range of men’s and women’s fashion, as well as children’s clothing. Its affordability and reach sets it apart from its competitors and has allowed it to grow to a massive $100 billion hectocorn valuation.

4. Canva

With the growth in online business and digital marketing it was only a matter of time before a user-friendly graphic design company came along. Canva is used by millions for posters, presentations, social media images, and brand logos. The website offers a free and paid version appealing to a broader audience and enjoys a $40 billion unicorn valuation.

5. Discord

Popular within the gaming community thanks to its video, voice and text capabilities, Discord is a user-friendly platform that’s available on both mobile and desktop. The platform has over 150 million monthly users and is classed as a unicorn company worth $15 billion.

Are Apple, Amazon, Google, Facebook or Tesla Unicorn Companies?

Known as the Big Five, the companies mentioned above fulfil much of the criteria required to be a unicorn company. They all enjoy massive revenue and profits, have innovative tech that has disrupted the industry and outperform competitors, and attract the industry’s leading talent. You might be surprised then to learn that they are not unicorn companies.

The Big Five are global conglomerates, however, they are no longer privately owned, meaning they are listed on the stock exchange and therefore no longer qualify as unicorn companies.

What are the Drawbacks of Being a Unicorn Company?

It’s clear there are many advantages to unicorn companies, amazing profits, industry-leading talent, and innovative solutions, but it’s not all plain-sailing. There are some downsides to unicorn companies that must be mentioned.

  • Unicorn companies tend to have increased media attention and public interest, and while this leads to better talent it also means there is more scrutiny. Owners and employees of unicorn companies must ensure they say the right things and manage their public image well.
  • Another downside of a unicorn company is the difficulties it might face when procuring investment or managing debts. Since unicorn companies remain in the private sector they don’t have access to financial markets, making it harder for them to sell shares and debts.
  • In a limited company, it’s possible to share shares to raise capital or turn debts into bonds, but this is not possible for a unicorn company. Instead, unicorns must rely on raising private investment, which could be challenging if the economy is experiencing any downturns.
  • It can also be challenging for investors to put their money into unicorn companies because of certain restrictions. Due to the size of a unicorn company, investment is closely monitored by US security laws meaning only investors earning $200,000 can invest in a unicorn company.
  • Only people with a valuation of $1 million are allowed to buy equity in private companies, which is good news for small investors who gain protection, but not so good for unicorn companies who have trouble securing high-level investment for people in the private sector.
  • Since unicorn companies only accept high-level investments it can make it difficult for small to medium-sized investors to benefit from the company’s spectacular growth, so unless you have substantial capital, you won’t be able to share in the success of a unicorn company. That said, a small investor can do the private funding phase and invest when it becomes public.
  • There are also issues around the valuations of unicorn companies. Every company has a valuation based on current profits and future projected success, but often, unicorn companies have valuations that are in excess of their reality.
  • Financial analysts suggest that unicorn valuations are a shot in the dark and in some cases made up entirely. These valuations come from calculations made by company owners, lawyers, and financial forecasting, and there is a benefit to inflating the company’s success.

How Can My Company Become a Unicorn?

If you intend to create a unicorn company there are criteria you must meet. These include offering an innovative product, making an impact on people as well as a profit, investing in the company’s mission, having the talent to grow the business, and finding the investment.

Unicorn companies tend to happen by accident rather than by design though – take Facebook, for instance. It began as a small university project and did not intend to become a unicorn business.

Final Thoughts

In this article we have discussed the definition of a unicorn company and covered some of the key criteria that gives it a unicorn status: this includes a $10 billion valuation and influence over people as well as substantial profits.

Whether you are thinking of starting a unicorn company or you’re looking to invest in one and grow your portfolio, it’s a sensible idea to get a firm grasp of the unicorn definition and its associated concepts. It’s also useful to understand the downsides of investing in unicorns.

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!