Unicorn: What It Means in Investing, With Examples (2024)

What Is a Unicorn?

The term unicorn refers to a privately held startup company with a value of over $1 billion. It is commonly used in the venture capital industry. The term was first popularized by venture capitalist Aileen Lee. Unicorns are very rare and require innovation. Because of their sheer size, unicorn investors tend to be private investors or venture capitalists, which means they are out of the reach of retail investors. Although it isn't necessary, many unicorns work their way to going public.

Understanding Unicorns

A unicorn is what most people in the financial world call a startup that is privately owned with a valuation that exceeds $1 billion. Reaching unicorn status is a rare feat. In order to become a unicorn, companies must have an innovative idea, a clear vision for growth, and a solid business plan, as well as a viable way to get their message to venture capitalists and private investors.

There are several options that unicorns have when it comes to their exit options, including:

• Remaining private. Founders who want to retain control tend to keep their unicorns private. But this limits the potential for growth. And they often must find ways to provide funders with a return on their investments.
• Going public. Companies get access to the capital they need to grow with an initial public offering (IPO). Some unicorn executives may be slow to take their companies public because it means diluting ownership.
• Appealing to a buyer. Company owners and executives can achieve their goals quicker than if they remain private or by going public.

The term was coined by Aileen Lee, founder of Palo Alto-based Cowboy Ventures, a seed-stage venture capital fund. She first wrote about them in her article, "Welcome to the Unicorn Club: Learning from Billion-Dollar Startups," in which she looked at software startups founded in the 2000s and estimated that only 0.07% of them ever reach a $1 billion valuations. According to Lee, startups that reached this mark are so rare that finding one is as difficult as finding a mythical unicorn.

According to Lee, the first unicorns were founded in the 1990s. Alphabet (GOOG)—then Google—she noted, was the clear super-unicorn of the group with a valuation of more than $100 billion. Many unicorns were born in the 2000s, though Meta (META), formerly Facebook, is the decade's only super-unicorn. Some of the other more popular unicorns based in the U.S. include home-sharing giant Airbnb, video game company Epic Games, as well as fintech companies Robinhood and SoFi.

Special Considerations

The term isn't just exclusive to the world of startups. In fact, it is also a common word used to describe s recruitment phenomenon within the human resources (HR) sector.

HR managers may have high expectations to fill a position, leading them to look for candidates with higher qualifications required for a specific job. In essence, they seek unicorns, which creates a huge disconnect between their ideal candidate and those in the pool of people available.

For example, a medium-sized firm may want to recruit someone with marketing, social media, writing, sales, and management experience. And they may seek someone who speaks three different languages. While it may be cost-effective to hire one person with all those skills instead of multiple employees to handle separate tasks, it may be too much for the new hire to handle and can lead to disappointment.

Unicorn Valuations

The value of unicorns is generally based on how investors and venture capitalists feel they will grow and develop, so it all comes down to longer-term forecasting. This means their valuations have nothing to do with their financial performance. In fact, many of these companies rarely generate any profits when they first get running.

Investors and capitalists may come across some hurdles, though. If there are no other competitors in the industry—making the startup a first of its kind—there may be no other business model with which to compare, making it a somewhat complicated process.

Unicorns and Venture Investing

Since the publication of Lee's article, the word unicorn has become widely used to refer to startups in the technology, mobile technology, and information technology sectors—usually at the intersection of all three—with very high valuations questionably supported by their fundamental finances.

Benchmark Capital partner Bill Gurley wrote about the difference between late-stage private capital fundraising and an IPO in a blog post, saying that "an unprecedented80 private companies have raised financings at valuations over $1B" since the 2010s, and that "late-stage investors, desperately afraid of missing out on acquiring shareholding positions in possible 'unicorn' companies, have essentially abandoned their traditional risk analysis."

The question of whether the technology sector's unicorns constitute a reinflation of the dotcom bubble of the late 1990scontinues to stir debate:

• People like John Mullins (who wrote the book The Customer-Funded Business) argue that the increase in the number of new companies valued above $1 billion is a clear sign of froth in markets.
• Others argue that a large number of companies with high valuations is a reflection of a new wave of technologically-driven productivity, similar to the invention of the printing press nearly 600 years ago. For example, SV Angel made the most early-stage investments in companies valued at over $1 billion, according to 2019 data.
• Still, others suggest that globalization and the monetary policy of central banks created great waves of capital sloshing around the globe on a hunt for unicorns since the Great Recession.
  

Examples of Unicorns

Far from being merely mythological creatures, unicorns are a regular feature in business and finance. In fact, there are more than 1,000 unicorns around the world, as of March 2022. Collectively, they are valued at over $3,516 billion.

Some familiar U.S.-based unicorns include Uber, Airbnb, SpaceX, Palantir Technologies, WeWork, and Pinterest. China claims a number of unicorns as well, including Didi Chuxing, Xiaomi, China Internet Plus Holding (Meituan Dianping), and Lu.com.

The following are some examples of very popular unicorns.

Nuro

One hot unicorn startup is Nuro, an autonomous vehicle delivery company that was founded by two engineers from Waymo, which is Google's self-driving car project. Founded in 2016, Nuro became a unicorn startup after receiving a $940 million investment from SoftBank Group, which put the company's valuation at $2.7 billion.

Nuro found a unique space in the autonomous vehicle industry, focusing on zero-emissions local delivery vehicles. Since then, Nuro has grown and acquired other startups including Ike Robotics. The company now has a few pilots, including its R1 and R2 generation of cars that is prototyping deliveries of medical supplies in California, as well as groceries in Fry's Food and Drug and Kroger stores. In March 2022, Nuro hit a valuation of $8.6 billion.

Instacart

Grocery delivery app Instacart is also another unicorn with over $2.7 billion in funding. The company was founded in San Francisco in 2012 and boasts over 500,000 items from local stores including Whole Foods, Safeway, Jewel-Osco, Costco, and Harris Teeter.

As of March 2022, the company slashed its $39 billion valuation by nearly 40% to about $24 billion. The move was motivated by market conditions and the need to appeal to a better labor pool.