Unicorn is a word widely used in the venture funds market to indicate tech startups with a total market value of over a billion USD.
The name was first coined and popularized by Aileen Lee, a venture entrepreneur and the founder of CowboyVC – a seed stage investment fund based in Palo Alto, California, USA.
What do you think why are stockholders crazy about “billion dollar outcomes”? Reason being, the largest investment funds have always driven revenue from their ownership in several companies, only to invest it back into a pool of various new promising businesses.
Moreover, traditional investment funds have expanded significantly in size, demanding more substantial “exits ways” to produce satisfactory returns. For example, to return the primary venture investment of 400 million USD, they might require to own 20 per cent of two different $1 billion businesses, or 20 per cent of a $2 billion business when the company goes public.
According to Aileen Lee, there’s a solid psychological difference in perception of a company when it reaches unicorn status: “One billion is better than $800 million because it’s the psychological threshold for potential employees, customers, and the press.”
Aileen Lee actually wanted to understand how probable it is to find and fund these promising new startups, so in the year 2013 she conducted research and discovered that only 0.07 per cent of venture-backed businesses were evaluated and valued at more than $1 billion. Lee decided to share her findings, but first she had to invent a term that could accurately depict this particular class of companies.
Here’s the back-story in her own words: “I was trying to come up with a word that could make it easier to use over and over again. I initially played with different words like ‘home-run,’ ‘megahit,’ etc and they just all sounded kind of ‘blah.’ therefore I put in ‘unicorn’ because they are – these are limited companies in the sense that there are hundreds of startups in tech industry every year, and only a handful will wind up becoming a unicorn company. They’re very rare.”
The fact that the term itself was inspired by fiction genres, popular among techies – sci-fi and fantasy – has further solidified its place in Silicon Valley business discussion circles.
Here’s what Robin Lakoff, the professor of linguistics at the University of California, Berkeley, has to say about the term: “In a way, this term romanticizes tech companies: it takes them from the remote and incomprehensible to the magical and lovable, while also being rare and powerful at the same time. I certainly would feel nicer toward these megarich tech startups if I could think of them as unicorn-like.”
Lee’s article wasn’t the sole reason why the name became so prevalent. Over the past few decades, two significant changes in the IT industry have created the need for a term that could describe private billion dollar tech companies.
That said, right now, there’s no actual mathematics to estimate startups – the evaluations are often based on a specific company’s business potential, and are mere approximates. This has made it reasonably easier for startups to earn billion dollar estimates.
The other significant change is that venture supported businesses stay private much longer than in the previous decades. In 2000, the intermediate-term of an initial public offering was 3.1 years, as per the National Venture Capital Association. This number has doubled in 15 years, partially because serveral promising businesses want to benefit from the overly friendly estimating environment before they can go public. Besides, the development of private marketplaces has made it very simple for unicorn stockholders to withdraw their investment without pushing their startups to go public and come under the ever vigilant lens of Wall Street’s eyes.
Merged, these 2 differences lead to the appearance of more unicorns than ever. In 2018 alone, 16 new businesses became unicorns and raised the number of global private startups that are valued at $1 billion or more to 119.
Far from being imaginary animals, unicorns are a natural topic in contemporary business and investment discussion circles. Some wellknown U.S.-based unicorns are SpaceX, Uber, Palantir Technologies, Airbnb, Pinterest, and WeWork.
China has a lot of unicorns as well, including Didi Chuxing, Lu.com, Xiomi and China Internet Plus Holding etc.
There are several lists of unicorn startup businesses available on the internet, with notable lists compiled by Fortune , The Wall Street Journal, TechCrunch, CNN Money/CB Insights, and PitchBook/Morningstar.
“Unicorns” can also refer to recruitment within the HR . HR executives may have higher demands when closing a specific job position, leading them to look for specialists with specific skills that are more powerful than those usually required for the post. In other words, these HR execs are looking for a “unicorn,” which then leads to a break between their ideal candidate versus the realistic pool of professionals actually available.
For example, a medium-sized company may need to find and hire a person who has sales, writing, marketing, social media, and management expertise, as well as fluency in two different foreign languages. Although it may payoff to hire one candidate with all those skills instead of several different employees to manage these tasks, it is also likely that these duties and responsibilities will be challenging to cope with for a new employee, leading to frustration.