What Is A Unicorn?

What is a unicorn in the finance world and what does it have to do with the one-horned mythical creature of old? Herein lies an explanation.

Sept. 26, 2020

Simply stated, a unicorn is any privately-owned startup company that is valued at $1 billion dollars or more; other terms like decacorn (previously super unicorn) and hectocorn refer to companies with over a $10 billion and $100 billion-dollar valuation, respectively. The term was coined by Cowboy Ventures founder Aileen Lee in 2013 to correspond with the rarity of such organizations. Fast forward to 2020 and you’ll find that there are over 600 unicorns, the highest number to date, with a combined valuation of nearly $2 trillion. 

Exit, pursued by a bear

To exit unicorn status, the company either goes public with an IPO, like Zoom (NASDAQ: ZM) did last year, or is acquired by another company, like Alphabet’s (NASDAQ: GOOG) acquisition of then-unicorn YouTube in 2006. The company can either launch its IPO traditionally, or as a direct listing, in which only existing, outstanding shares are sold without the assistance or costly underwriters. Both Palantir (NYSE: PLTR), launching September 23, and Slack (NYSE: WORK) have chosen this route. 

Startups are normally funded by venture capital firms like Sequoia Capital and Index Ventures, but there’s a limit to how much they can offer to a financially unproven entity; and most unicorns are unprofitable. This is when a company would choose to go public and issue shares, having the added cachet of belonging to such a prestigious club. That’s not to say that a unicorn’s stock will perform well once launching. In fact, in the period between 1980 and 2016, over 60% of all unicorns offered negative returns 5 years after launching IPOs. 

Are unicorns good investments?

For every Zoom, which is up nearly 575% and Spotify (NYSE: SPOT), up over 54%, both since going public, there’s also a Lyft (NASDAQ: LYFT) and a Dropbox (NASDAQ: DBX), down over 60% and 30%, respectively. What’s rarer than a unicorn? A profitable one like Zoom, as only 40% of all startups show any sort of profit. Since it’s a private organization, it’s difficult to gauge a unicorn’s profitability prior to listing as the company isn’t required to report its financials.

Elon Musk’s SpaceX, valued at $46 billion, is profitable, according to CEO Gwynne Shotwell, and is the most valuable unicorn in the U.S. Second in line is Stripe, a payment processing company valued at $36 billion, and its profitability is unknown. In third place is data analytics company Palantir, valued at $20 billion, whose profitability is non-existent. As with all investments, it’s important to do your due diligence before investing in a unicorn IPO. 

Unicorns past and present

The first unicorns were founded in the 1990s and in the years following, behemoths like Facebook (NASDAQ: FB) and Google, leaders for their decades, were valued at $83.5 and $23 billion, respectively, pre-IPO. Occurrences like these were rare 20 years ago. The recent growth in unicorns can be attributed to the tech sector, which represents over 40% of all unicorns (251 out of 615, to be exact) worldwide due to the industry’s globally scalable products. This promise of growth attracts more funding. 

The U.S. doesn’t hold a monopoly on unicorns as the biggest unicorn globally-a hectocorn, in fact-is Chinese company and owner of TikTok, ByteDance. The company, valued at $140 billion, is worth more than the combined value of the next three unicorns under it.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.