A “unicorn” is a business and investing term for private startup companies with a valuation of $1 billion or more. Unlike the mythical creature, unicorns are a very real part of the modern business landscape. As of July 2021, there are more than 700 verified unicorns operating worldwide.
In the sections below, we will look at exactly what a unicorn company is, how these companies develop, and how a unicorn may fit into your investing strategy. Continue reading to learn all you need to know about unicorn startup businesses.
Definition and Examples of Unicorn
A unicorn is a private company with a valuation of $1 billion or more. According to CB Insights, there are 750 unicorn companies worldwide.
While some unicorns operate under the radar for the typical consumer, others have become household names. Ride-sharing platform Uber can be considered a unicorn company, as it was once a startup venture initiated in 2009 before it eventually went public in May 2019. With its unique platform, and the timing of which it was able to gain popularity and capital, Uber continued to successfully receive funding, amounting to about $50 billion in 2015.
How Do Unicorns Work?
Most unicorns start as small startups, just like virtually every other company in the world. Each startup has to raise capital to succeed and eventually raise more capital. Unicorns tend to see early success with customer growth or revenue and attract outside investments from major venture capital funds.
Investing in unicorns is typically seen as a highly risky venture with the potential to bring in high returns. As privately held companies that have yet to go through an IPO, there is no public market to trade the securities of unicorns. That means the market valuation of a unicorn may not reflect the true value of the business at hand.
Generally, investors in unicorns are private funds, wealthy individuals, and direct owners or employees of the unicorn itself. In some cases, SEC-registered mutual funds, exchange-traded funds (ETF)s, and business development companies may invest in unicorns, too.
To grow, a unicorn needs to raise money from investors in a series of funding rounds. Investors offer to make a specific investment amount at a specific valuation—the value of the company. With each successive funding round, a company’s valuation generally increases, and the purchase price per share increases accordingly.
Types of Unicorn
All unicorns are private companies, but there is no rule on what those companies can do. Unicorns often emerge from the fast-growing technology sector, but there’s no reason a manufacturing, service, or other type of startup couldn’t achieve unicorn status.
While most regular investors can’t buy into these pre-IPO companies, you can find them in industries including:
- Artificial intelligence
- Auto and transport
- Consumer and retail
- Data management and analytics
- Internet software and services
- Mobile and telecommunications
- Supply chain and logistics
Pros and Cons of Unicorns
There are both pros and cons to unicorn companies.
Tend to have a good business outlook
Vetted by investment professionals
Not easy to invest in
Relatively high-risk investments
- Growing businesses: Unicorns typically represent growing businesses that have demonstrated proven success over many years.
- Tend to have a good business outlook: Most new unicorns have built-in growth assumptions and a positive long-term outlook. Based on a series of funding rounds, unicorns are often expected to offer high returns.
- Vetted by investment professionals: Unicorns gain their value from professional investment firms specializing in identifying companies with good investment growth potential.
- Not easy to invest in: Most individual investors can’t put funds into unicorn businesses, as they are private companies. Generally, wealthy individuals and private funds such as venture capitalists invest in unicorns.
- Relatively high-risk investments: Startups on the way to unicorn status are typically riskier to invest in than the overall stock market, especially for retail investors. The securities tend to be illiquid, or not easily sold for cash. Plus, it can be more challenging to get a hold of a unicorn’s financial information to weigh the potential of the investment.
What It Means for Individual Investors
In the case of public companies, individual investors can easily open a stock market account to buy and sell stock. However, investing in private companies is often limited to wealthy accredited investors, as the risk is considered high. Unless you’re a very wealthy individual, you may not have many options for investing in unicorn companies.
If you are interested in unicorn investing, consider investing in a mutual fund or ETF that focuses its funds on private companies. That could give you exposure to the unicorn market without the wealth to get direct access.
Before making an investment decision, look into the holdings, fees, strategy, and past performance of a company to decide if it’s right for you. You may also consider seeking guidance from a financial advisor.
- The term “unicorn” refers to a private company with a valuation of $1 billion or more.
- Investing in unicorn companies is typically seen as a highly risky venture with the potential to bring in high returns.
- Generally, investors in unicorns are private funds, wealthy individuals, and direct owners or employees of the unicorn itself.
- Unicorns are not common investments for most retail investors.