You may have heard this term used to described companies – unicorns that come seemingly from out of nowhere, attracting heaps of attention, creating massive windfalls for their investors. But what are they and are they as magical as their namesakes are?
Richard Cayne reviews this phenomenon, “People see headlines about ‘unicorns’ and billions of dollars and immediately want in. The problem is that it is not so simple. Those impressive numbers may not represent reality, just as unicorns are imaginary.”
What are unicorns?
Perhaps if we look at the origins of the term, we may get a little more clarity. Aileen Lee, founder of Cowboy Ventures, wanted to find out how often could a venture capital investor find a start-up valued at $1 billion or more. Back in 2013, they were around 0.07% of venture-backed software businesses. She called them “unicorns” because they were so rare, averaging about four a year for the decade she researched. But the name stuck. Now it refers more to the valuation than to the rarity – since 2018, there have been over 100 unicorns identified each year (the 2020 numbers were extrapolated, but very likely to break 100).
Is being a unicorn a sign of success?
With the number of unicorns growing every year, it raises the question of what that means. How does a company get valued so at such a high amount? Well, it is mainly guesswork, but do not let the financial wizards hear that. Rather, let us call it modeling. They take what they anticipate the company’s performance will be in the future, usually when it can be considered a stable company and not a start-up, and then apply that to current operations and financials. Extend to estimated future expenses and returns and you get a valuation. Usually this is by the startups themselves or by the banks or venture capitalists looking to invest, so you can see how these numbers may sometimes be overly optimistic.
In a way, this is necessary since many start-ups are still working on how to monetize their product or service (think Facebook or Google), but they turn out to be raging successes. But, then again, there are not so successful stories like Groupon or WeWork (see below)
How can I invest in unicorns?
Typically, investing in unicorns are in the realms of high net worth individuals, venture capital, and private equity. For other investors, they have to wait until they company is acquired or merges with another company that they can invest in or until the unicorn goes public in an IPO.
The problem with the IPO is that that valuation we mentioned earlier receives greater scrutiny. WeWork failed to even make it to IPO because it was hard to sell a company that leased office space to basically sublet at monthly subscriptions was worth $10 billion. Groupon made it to IPO, the biggest tech one since Google, but then lost over 80% of its value within a year because its accounting was suspect, among many other missteps.
Learn more about unicorns from an expert
Maybe unicorns should remain in childhood fantasies. But it is not unreasonable to dream of great returns on your investment. To make sure that you are putting your money in the best opportunities possible for you, check with a trusted financial consultant like Richard Cayne of Meyer International in Bangkok Thailand and Asia Wealth Group Holdings listed in London UK. He has the experience with a range of successful investment strategies so that you do not have to chase unicorns.