Unicorn (finance)

In finance, a unicorn refers to a company, usually a start-up, valued at $1 billion or more. As of 2020, there were about four hundred unicorns throughout the world. Most were based in the United States and China and dealt in various branches of the technology industry. Some of the most notable were Facebook, Airbnb, Robinhood, Uber, SpaceX, WeWork, and Pinterest. Start-ups worth $10 billion or more are known as decacorns, while companies reaching $100 billion are called super-unicorns or hectocorns.

Background

People have been forming companies for thousands of years. These companies may operate in countless fields and serve customer needs in a wide variety of ways. Traditionally, companies bring known goods and services into established markets using time-tested methods, such as a hardware store offering tools and lumber to local builders. These companies are usually stable and predictable but generally offer few new ideas or room for dynamic expansion or earnings.

With the growth of technology, particularly computer technology, in the late twentieth century, greater opportunity opened up in business. Motivated individuals and small groups were able to invent new programs and devices on their own. Often, these inventions were revolutionary, outpacing the established designs and offerings of major technology companies. However, their entry into the tech market was hampered by the smallness of their business operations. These small operations generally did not have the money or resources to mass-produce, advertise, or distribute their inventions to the market. Subsequently, many of these inventions were lost, scooped up for bargain rates, or even stolen by competitors with greater resources.

The 1990s saw the popularization of a new kind of business, known as the start-up company. Business experts have defined this term in many ways. In general, however, a start-up refers to a small entrepreneurial venture run by about one to three people. This venture is based around an idea, a product, or a service that the organizers believe is new and important and will be in demand in a particular market. Start-ups thereby function to find effective, and often imaginative and innovative, ways of bringing their ideas and inventions to a market.

Start-ups operate much differently from traditional businesses. They usually offer new kinds of goods and services that consumers may not be familiar with. They may try to be noticed or insert themselves into huge industries typically dominated by extremely large and powerful companies. Start-ups may also be challenged by a lack of funding, necessitating the operators to provide their own money or raise money from loans or hopeful investors. These factors all create high levels of risk that most traditional businesses do not have to face, meaning that start-ups are characterized by major uncertainty.

Start-ups are unique forms of business. They are formed by hopes and dreams and threatened by uncertainty but must operate to high levels of efficiency if they hope to succeed. Start-ups usually struggle to gain funding, grow, and fend off various rivals for consumer interest. They generally require great dedication and long hours of work, sometimes over years or decades, from their founders to have even a chance of success.

Overview

Many start-ups fail or underperform for a variety of reasons. However, some start-ups catch on and become remarkably successful. Some of the most famous and profitable companies of the modern era began as start-ups. The most successful of these entrepreneurial ventures, particularly those valued at $1 billion or more, have come to be known as “unicorns.”

This term was introduced in 2013 by Aileen Lee, a venture capitalist based in Palo Alto, California. (A venture capitalist is an investor who supports new, potentially profitable small business ventures.) Lee performed a study showing that only 0.07 percent of software start-ups of the 2000s reached the billion-dollar mark. She therefore compared the rarity of successful start-ups to the ultimate rare and wonderful beast, the unicorn, the one-horned horse of myths and fairytales.

The unicorn designation quickly became popular in financial circles, and as start-ups became an increasingly powerful economic force, the term took on a life of its own. Whereas the original unicorn has one horn, representing $1 billion, new variations arose for even larger successes. Start-ups worth $10 billion or more were called decacorns (“ten-horns”), and start-ups worth $100 billion or more were termed hectocorns (“hundred-horns”). The latter group is also sometimes called the “super-unicorn” category.

According to Lee’s study, the first true hectocorn was Google, which was founded in the 1990s. In the first decade of the 2000s, the most prominent hectocorn was Facebook. As of January 2020, there were likely about 400 unicorns globally, primarily in the United States and China. Most of these start-ups are in technology, including information technology and mobile device technology. Some of the best-known unicorns include Airbnb, Robinhood, Uber, SpaceX, WeWork, and Pinterest.

Although unicorns offer extremely varied products in equally diverse ways, business experts have identified several similar characteristics among them. Unicorns generally deal with innovations on many levels. They usually are trying to market innovative products but also use innovative ideas to move forward. Most unicorns are designed to grow and gather financing quickly. This so-called “fast-growth strategy” allows the startup to take in huge amounts of investment before it enters the market. Many unicorns are targeted for buyouts by larger companies that seek to incorporate new innovations as well as prevent them from falling into the hands of competitors.

Start-ups and unicorns have become an extremely influential part of the modern economic system but have gained much criticism as well. Much of this criticism is about how start-up companies are valued by investors and capitalists, rather than the start-ups’ actual financial reality. Critics believe that many investors and companies are overly enthusiastic about start-ups and value them too highly. This practice can lead to a dangerous bubble, or overvaluation, in a market or industry.

Bibliography

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“How Unicorns Grow.” Harvard Business Review, Jan.–Feb. 2016, hbr.org/2016/01/how-unicorns-grow. Accessed 4 Feb. 2020.

McGowan, Emma. “What Is a Startup Company, Anyway?” Startups.com, 2020, https://www.startups.com/library/expert-advice/what-is-a-startup-company. Accessed 4 Feb. 2020.

Pride, Jamie. Unicorn Tears: Why Startups Fail and How to Avoid It. Wiley, 2018.

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Thiel, Peter and Blake Masters. Zero to One: Notes on Startups, or How to Build the Future. Crown Business, 2014.

“Unicorn.” Divestopedia, 2020, www.divestopedia.com/definition/5114/unicorn. Accessed 4 Feb. 2020.

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