Maybe you heard about unicorn start-ups at a business networking event. Maybe you read about them in the newspaper. Whatever way you came across them, you’re probably wondering what they’re all about, and whether they’re relevant to your investment portfolio.
So Just What is a Unicorn Company?
In the past, we may have called unicorn companies simply “success stories”. But in the now-famous 2013 TechCrunch article, venture capitalist Aileen Lee popularized the term, and it stuck.
A unicorn company refers to a startup with a valuation of more than $1 billion. They represent that one in a million idea that quickly gains both profits and world-wide acclaim.
To be more precise, a unicorn company comes around roughly once in every fourteen thousand start-ups. Data tells us that for every 100,000 start-ups, we get about seven unicorns. And they’re names you would recognise. The likes of Uber, DoorDash, AirB&B, and SpaceX are all unicorn companies.
So, despite their familiarity, unicorn companies are incredibly rare. It’s no mean feat to achieve a billion-dollar valuation while still in the startup or pre-IPO stage.
Unicorn companies are so rare that only an elusive, mythical creature seemed like the right way to name the group.
And yet, we all hope for that unicorn investment opportunity, don’t we?
Capturing Unicorns: Fact or Fiction?
Despite what you may think, it is possible to capture a unicorn startup, if you know where to look.
Most unicorn companies have one big thing in common: they’re based in technology. AirB&B, SpaceX, Uber, Stripe…Most of these companies are taking a familiar service (holiday accommodation, taxi rides, paying by credit card) and reimaging them using tech.
So, if there’s one type of startup you should look at a little more closely in your search for a unicorn, it’s tech start-ups.
How to Recognise a Tech Unicorn Startup
A good broker will carefully evaluate the books on any pre-IPO startup before forming an opinion on their viability. That said, it’s important to hold your own opinion, and there are certain traits to look for when chasing a unicorn.
First, keep an eye out for a startup that has the potential to disrupt a massive industry. Uber is a prime example, with its shake up of the taxi industry. These startups challenge industries as we know it, and completely change the game. In some cases, they become the industry they stand for, such as Google and search engines, and Facebook and social media.
Second, it’s important that a pre-IPO startup is genuinely in its early stages. Their value should still be less than $1 billion, but it should be clear from the books that they’re well positioned to hit the $1 billion mark in future.
Third, they should have going public in their future plans. The real secret to making a huge return on investment in the pre-IPO is travelling with a company from its private through to its public stages. What you want to do is capture a unicorn while its stock prices are still reasonable, then reap the rewards when its public valuation is in the millions.
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