We are all familiar with the famous mythical creature, the unicorn, but have you heard of a unicorn in the financial industry? We’re talking about “Unicorn Investing,” a term that has carved its way into becoming a widespread concept in tech circles in Silicon Valley and beyond. So, if you want to learn about investing in unicorn companies, let’s start from the basics.
What Is A Unicorn Company?
The term “unicorn” in relation to companies was made popular by co-founder of Cowboy Ventures and venture capitalist Aileen Lee. According to her categorization, unicorn companies refer to privately held startups that have a value of more than $1 billion. As the name suggests, unicorn companies are rare and generally include companies that have breakthrough innovations. Such companies can come from any industry but primarily concentrate on the technology niche.
Of course, growing a private company to a $1 billion valuation is a herculean task, but such companies share some common characteristics. Some of these defining characteristics are:
- They are in a large market that has benefited from shifts in the global advertising market.
- The services or products offered are innovative, disruptive and have changed how a specific industry operates. A fitting example is Uber, which has changed the taxi industry.
- They have exceptional leadership from their CEO and management team.
- They have achieved fast growth in terms of sales.
Reaching the status of a unicorn company is a rare achievement. To be considered a unicorn, the company must have a groundbreaking idea, a strong vision for growth, a clear business plan, and solid ways of getting its message to private investors and venture capitalists.
Some of the most famous unicorn companies worldwide include Amazon, Airbnb, Robinhood, SpaceX, Instacart, ByteDance (owns TikTok), SHEIN, Canva, OYO Rooms, reddit, and OpenAI.
How Does Investing In Unicorn Companies Work?
Just like nearly every other company, most unicorns start as small startups. When a company is in its inception, the founders will likely raise funds from family and friends or opt for a bank loan to get it off the ground. After that, venture capital firms and angel investors would offer additional funding in exchange for a stake in the company. The rate of exchange between the percentage of the company offered versus the amount of money received forms the company’s valuation. For example, a venture capital firm may offer a $100,000 investment in exchange for a 10% stake in the company, which indicates a total valuation of $1 million.
On the other hand, investing in unicorn companies is only possible for individual investors once the company goes public through an Initial Public Offering (IPO). Having said that, a lot of companies that became public as unicorns have handsomely rewarded their shareholders in the recent past.
The Pros of Investing In Unicorn Companies
Given the high potential of unicorn companies, they generally attract substantial investment, even across borders. This kind of popularity contributes to investment activity and capital inflow while positively contributing to broader economic growth. Unicorn companies also significantly impact the markets they operate in, leading to higher innovation and competition, benefiting consumers, and much more. Therefore, investing in unicorns can be exciting, thanks to its undeniable potential for rapid growth and excellent returns.
Here are some key advantages of investing in unicorn companies:
- Unicorn investing offers exponential returns, particularly if the company continues its growth trajectory.
- Unicorn companies are targets for acquisition by more prominent names, or they could choose to go public. Either way, there are significant financial benefits for early investors.
- Generally, investing in unicorns means investing in new technology and innovation. This allows investors to become a part of disruptive industry changes.
The Cons of Investing In Unicorn Companies
It goes without saying that unicorn investing has its fair share of risks. Here are some risks associated with it that investors should know about:
- There is a high risk of failure because the startup environment is generally very risky. Countless startups fail, and unicorns are not immune from it despite their potential and high valuations.
- Inflated expectations of growth potential come with the risk of overly optimistic valuations based on hype instead of financial performances.
- Unicorn investments are less liquid than investing in publicly traded companies. Therefore, investors will be unable to sell their stake quickly if they wish to do so.
- Since unicorns operate in very volatile markets and are susceptible to rapid changes, it brings an element of unpredictability that can impact the success of the unicorn and the investors’ returns.
Investing in unicorn companies is like spotting that rare bird – it’s exhilarating but not always easy. Unicorn companies represent a rare breed of startups that are valued at over $1 billion and have the potential for rapid growth and groundbreaking innovation. Such companies have substantial economic implications, like wealth generation, job creation, and market competition. At the same time, they come under criticism, too, which includes concerns about sustainability, inflation valuations, and ethical aspects.
While unicorn investing sure has the potential to offer exponential returns, there are high failure rates to consider, too. This is why it is crucial to understand unicorn companies’ lifecycle, from initial funding to potential exit strategies. Knowing about this is highly important for stakeholders and investors as it helps to navigate the risks and rewards.
The fact is that unicorn companies, like its namesake, are a rarity and a specialty because they’re not only doing something new and different, but they’re excelling at it, too. Such companies have big ideas and strong leaders and are growing at breakneck speed, which makes them attractive options for investors. If you’re an individual investor, you may have to wait until the unicorn company goes public to invest.
So, the next time you hear someone talking about unicorn companies, you will know exactly what they’re talking about. If you have decided to invest in one, carefully consider the holdings, fees, past performances, and strategies before deciding if the investment is worth it. Also, given the risks associated with it, consider getting professional guidance from a financial advisor who can help you make a better-informed decision.