In private investing, there are not many companies that can capture as much attention as unicorns. What are unicorns? These are startups valued at $1 billion or more, but what exactly makes a company achieve such a status? How can investors identify potential unicorns before they reach that mark? In this blog, we will explore some key characteristics of unicorn companies, the indicators that may signal potential unicorn status, and some of the risks and rewards an investor may encounter.

What Makes a Unicorn Company?

A unicorn company is typically defined by its private market valuation of $1 billion or more. This status can be seen as a benchmark of success, although it doesn’t guarantee long-term profitability or stability. Valuation alone doesn’t make a company a unicorn, rather it reflects a combination of factors that suggest strong market potential, innovation, and scalability.

Aileen Lee

Aileen Lee, founder of Cowboy Ventures, coined the term “unicorn” in 2013 in a TechCrunch piece titled “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups.” In the article, she describes the impetus for billion-dollar exits, what makes a unicorn, as well as the likelihood of startups achieving the coveted status of unicorn.

Notably, the unicorn ecosystem has changed significantly since the publication of this piece. While still uncommon, it is less rare now for companies to reach and surpass billion-dollar valuations than it was in 2013, with over 1,565 total unicorns globally to date.[1]

Characteristics of Unicorn Companies

While no one can predict which companies will become unicorns, several key factors may help investors identify potential candidates early in their lifecycle. These indicators could suggest that the company is on the right path toward growth in the private market. While these commonalities are certainly not absolutes, they are worth noting.

Privately Held

Unicorns are typically privately held companies that get capital by raising additional rounds of funding from venture capital or private equity firms. This enables them to remain private longer, which means these companies can potentially increase valuations from investors without ever setting foot on the public market.

Disruptively Innovative

Another major unicorn calling card is its ability to disrupt incumbent industries or big market players. A recent example of this is Netflix. Netflix fundamentally changed how people consume entertainment by shifting the industry from Blockbuster rentals towards on-demand streaming and reshaping the viewer experience by providing exclusive, personalized, and original content.[2]

First-Mover’s Advantage

While it’s not always the case, many unicorns are the first to get their idea to market. This means they have a natural advantage in terms of infrastructure and product offerings over imitators that may come along later.

Focus on Tech

Companies must constantly innovate to keep up with our rapidly changing tech space and attract the kind of investment needed to reach unicorn status. Whether it’s business-to-business (B2B) or business-to-consumer (B2C), new technological advancements have become intrinsic to market disruption.

Global Market Opportunity

The potential market opportunity for unicorns is usually global, which can offer the potential for rapid growth. A good way to spot a company that is rising in the ranks is the rate at which it acquires new users. A high growth rate can indicate that a company is potentially on its way to a higher valuation.

Risks of Investing In Potential Unicorns

Overhyped Valuations

The excitement around potential unicorns can lead to inflated valuations. As competition increases and investors rush to fund promising startups, valuations may not always reflect the true potential of the business. A company that appears poised for unicorn status might be overvalued based on hype rather than solid financials or sustainable growth. Chasing these inflated valuations can result in risk when company financials are released.[3]

Timing and Market Conditions

One of the biggest challenges when chasing unicorns is getting the timing right. Even companies that show promise can falter if market conditions are unfavorable. A rapidly growing market may suddenly shift, causing the company’s growth trajectory to stall. Similarly, a product or service that once seemed revolutionary might lose its appeal due to changes in consumer preferences, new competitors, or unforeseen events.

Unpredictable Growth Paths

Investing in potential unicorns can be speculative. Even the most well-positioned startups can struggle to maintain their momentum because the path to unicorn status is rarely linear. Many companies experience periods of rapid growth followed by slower phases, and some never fully scale to the level that would justify their initial hype. It can be easy to get caught up in the rush, but predicting sustained growth can be exceedingly difficult.

Risk of FOMO

One of the most common psychological traps when chasing unicorns is FOMO. As more investors and media outlets jump on the bandwagon, the pressure to be involved can cloud judgment. This can lead to pursuing opportunities based more on external buzz rather than a fundamental analysis of the company’s true potential. FOMO can encourage impulsive decisions, which could result in chasing trends rather than identifying companies with solid foundations.

Rewards of Investing In Potential Unicorns

Growth Potential

The biggest reward when finding potential unicorns may be the possibility of growth. For investors, catching a company on its upward trajectory before it hits that $1 billion valuation could be beneficial and personally rewarding. For entrepreneurs, being involved in a company that reaches unicorn status can elevate one’s career and potentially open doors to future opportunities. The potential to be part of something transformative is what some investors and entrepreneurs are looking for when it comes to potential unicorn companies.

Forefront of Innovation

Unicorns are often at the forefront of innovation. Whether you’re an investor or part of the team, being involved with a company that disrupts an entire industry or creates a new market can be rewarding. Being part of this cutting-edge progress can bring the satisfaction of contributing to a solution or product that impacts the world, sometimes in ways that were previously unimaginable.[4]

Access to Emerging Markets

Alongside being at the forefront of innovation, by investing in a potential unicorn company at an early stage, investors may be able to gain access to emerging markets and technologies before they become mainstream. Companies in this position could have the ability to get a competitive edge in an emerging market.

Final Thoughts

Opportunities in potential unicorns in the private market is an exciting endeavor, but it does not come without challenges. Overhyped valuations, unpredictable growth, and timing issues can trip up even the most experienced investors and entrepreneurs. Investors may want to pay attention to a company’s strong product-market fit, innovation, leadership, and scalability, combined with an awareness of the inherent risks to make informed decisions about potential unicorns when making investment decisions.

Want to learn more about unicorn companies and private companies? Check out the following blogs to learn more:

• An Accelerated Trajectory: The Rise of AI Unicorns
• Why Some Startups Choose to Stay Private
• The Pros and Cons of Investing in Private Companies
• Risk and Reward: Early- and Late-Stage Investing

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[1] https://eqvista.com/complete-list-unicorn-companies/

[2] https://www.imd.org/blog/innovation/what-is-disruptive-innovation

[3] https://www.cyndx.com/resources/blog/unicorn-companies/

[4] https://www.cyndx.com/resources/blog/unicorn-companies/

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.