Unicorn Company Defined: What Is a Unicorn Company?

In the world of business, the term unicorn company refers to a privately held startup that has reached a valuation of $1 billion. Once a startup company has reached unicorn status, it can strive for decacorn status (a $10 billion valuation—there are about 30 decacorns in existence) and then hectocorn status—sometimes called super unicorn (a $100 billion valuation).

Most companies that have landed on the list of unicorn companies share a few characteristics: Many are tech startups located around the Silicon Valley area of San Francisco, California. That area has an established tech companies sector—this includes cybersecurity software startups, fintech (financial technology) startups, and businesses working on artificial intelligence. There is also a growing number of unicorn companies based out of New York and China.

Venture capitalist Aileen Lee inadvertently coined the term unicorn company when she used the word “unicorn” in 2013 to describe the rare benchmark of reaching a billion dollar valuation, a status achieved by only the most successful startups. At the time Lee used the term, there were fewer than 40 unicorn companies total, so using the word for a mythical creature seemed apropos.

Today there are more than 700 private companies that are part of the unicorn club, and the number of unicorns will likely grow as more companies reach the billion dollar (or more) valuation. However, becoming a billion-dollar startup is still rare when you consider them against the larger landscape of entire industries and given the fact that unicorns must virtually perfect their business models in order to reach that point.

Valuation is an estimation of worth, either current or future, that takes into consideration factors like capital structure, projection of future earnings, market value of assets, and others. Keep in mind that high valuations do not necessarily equal profits or even revenue for companies. Here are steps you can take when trying to determine the value of any company, unicorn or otherwise:

• Figure out the price-to-earnings ratio. This process only becomes relevant once a unicorn startup has gone through the IPO (initial public offering) process. Then the company’s current share price in the stock market is measured relative to its per share earnings.
• Compare similar companies in public markets. Compare unicorn companies in private markets to similar publicly listed companies to try to determine a company’s possible future earnings. If there’s no similar public company, venture capitalists will then look to other private companies if they can access their financial records.
• Look at previous funding rounds. If a private company has benefitted from previous rounds of venture capital, investors can look at those financial numbers. The value of a startup tends to jump after each round of funding, so those numbers can be good metrics for how much investors already value a company.
• Conduct a market analysis. This strategy is like looking at similar companies in the public market, but this is more focused on researching the company’s target market and determining how other businesses are fairing. An oversaturated market or whether other companies in the same target market aren’t doing well could drive down a company’s valuation.
• Estimate future financials. Investors and venture capitalists determine company value by trying to estimate future earnings as well as when (how quickly) the company might be able to pay back investors.

Some of the world’s most valuable and most forward-thinking companies are unicorn companies. Here are a few reasons for their accelerated growth.

1. 1. Adopting a “grow fast” strategy: This strategy involves a company going through as many rounds of large funding as possible in a short period of time. A “grow fast” strategy can help set a startup apart from competitors and provide an opportunity to overtake the market. However, this can be a risky move if the business ends up being a fad or is in a market that more and more companies will enter.
2. 2. Advances in technology: The surge of social media is just one of the technology resources companies have used to try to reach unicorn status. Being able to reach millions of people they wouldn’t have had access to before, including people in the investing world, has opened up a plethora of opportunities for startups. Not to mention that artificial intelligence, general computing, e-commerce, and smart devices have come a long way in recent years—and startups are using them to their advantage.
3. 3. Buyouts: There’s no telling when a bigger company will buy out a startup. If a large company thinks their profits are at risk due to a newcomer in the market, they can easily arrange a buyout of the startup. That can be a win-win situation for both companies—the larger company eliminates a threat, and the valuation of the startup skyrockets. After all, some view a company as being worth only as much as someone else is willing to pay for it.
4. 4. More available private capital: More and more people are getting into the investing game and using their wealth to support companies they believe in. Because of this, there is an influx of available capital from private investors, which means startups don’t have to rush to IPO in order to increase the value of their company. The more rounds of private funding they can have, the higher their valuation grows.

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