We have all read about Unicorns …Startups who have reached billion-dollar valuations and some of them like byjus have always caught my fancy…
Every entrepreneur dreams that their business will be one of the ones that make it big. For a few very lucky start-up founders, this dream has become a reality and their ventures have truly hit the big leagues by earning a coveted spot in the so-called Unicorn Club. This is a very small number of privately held start-ups that are now valued at a billion dollars or more. Many of the big names will be very familiar to you, with household names like Uber, Airbnb, Pinterest, and Reddit all part of this exclusive club
While this has always caught my attention, I started thinking in detail about the same after my interaction with two of my friends who are into creation of startups which I consider could end up as unicorns.
One of them is creating what could be the mother of all marketplace apps (Swapp)and the second a gaming app (Hapiens) which could be the next Facebook of gaming…
So, what makes these brilliant startups to get valued at what they are valued or are most of them just overvalued to take care of returns for some of the investors who corner all the returns. Let’s find out …
What is a unicorn company?
Simply put, privately held companies with post-money valuations at or above $1B are categorized as unicorns. This designation is reserved for startup companies poised for significant growth in the near future.
This term was coined by Aileen Lee, the founder of Cowboy Ventures in 2013 She gave the companies this name due to the statistical improbability of a startup becoming a unicorn; at the time she estimated that only 1 in 1,538 venture backed companies would reach these lofty heights.
It’s worth noting that you’ll probably see some big names that look like they’re missing from the unicorn list – companies like Facebook and Amazon, for instance. These companies are now worth a mindboggling amount of money.
However, as both Facebook and Amazon have gone public and sold shares on the stock market, they’re not generally called unicorns anymore. This term only applies to companies that remain privately owned.
How do unicorns succeed?
1.Present in the right market
Most successful unicorns have identified an unfulfilled gap and
· Build a product based on the behaviour of the mass and have also predicted their next move/action to comply that product with the same
2. Rapid Growth
Unicorns often reach their status through practically meteoric growth. Just look at Uber, which is now the world’s most valuable startup. From its humble beginnings in San Francisco in 2009, the ride hailing app has now expanded into 785 cities around the world. In 2015, after just five years in operation, one billion trips had been taken using the app and this number doubled to two billion a mere six months later.
3. Fast Product Development
Early startups often lack the funds and the staff. As they’re often raising against completing things before the money runs out-they need to bring their product to market as soon as possible.
That means products need to be built, launched, and updated very quickly. Aiming for a perfect product straight away simply isn’t feasible; instead many companies release versions of their products as they go, allowing them to test and improve the product as they move forward
4. Strong Management Team
A well-rounded and experienced executive team that can handle all the challenges thrown at it, whilst still maintaining the ability to scale quickly. Studies have shown that the leading causes of small business failure are normally related to issues to do with the founding team:
5. Flexibility
Continuous and rapid changes in priorities can be part and parcel of startups life. Businesses need to stay ahead of the game and be willing to give their customers what they want – even if it’s slightly different to what you originally had in mind. Test everything and be prepared to change rapidly.
For example, did you know that Flickr originally began as an online role-playing game, and Twitter as a podcast search system?
6. Disruptive Tech and Services
Disruptive technologies improve upon and eventually replace existing marketplaces and services. Uber set out to revolutionize the taxi industry, offering an alternative to the status quo, whilst Airbnb has caused huge disruption in the hotel industry.
7. Excellent Product Positioning
Unique, desirable, and indispensable products are what have made most unicorns successful. For example, Slack gained much of its early renown as an office collaboration and communication tool through pre-release trials to businesses, word of mouth marketing and the clever PR hook of being a substitute to email
8.Right User Interface
While having the right product addressing the customer requirement is crucial the successful unicorns always had the perfect user interface to ease usage by customers
9. Right Marketing
Successful unicorns have always targeted the right potential customers with appropriate marketing.
How Do Unicorns Get Valued?
Typically, a start up’s valuation is calculated based on the value of the latest shares issued.
A study by University of British Columbia found that as many as 50% of unicorns wouldn’t have got their horns without the use of complex stock mechanics. Furthermore, they estimated that 10% of unicorns were overvalued by 100%.
Unicorn valuations are often based on a combination of the amount of money raised by investors and the amount of equity that was given away in return. This often becomes very clear when a unicorn goes public. Square, the payments technology company, had a post fundraising valuation of $6 billion in 2014, but after its IPO it was valued at the much lower $2.9 billion.
With all the glamour associated with the unicorn title, it’s perhaps no surprise that companies want to drive up their valuations. A high valuation makes it easier to get the attention of journalists and investors and drive further business efforts.
It is also observed that actual payback received varies from one share holder to another depending on the understanding that the promoters have reached at the time of receipt of funding
Startup founders often accept these terms knowing they may be able to successfully negotiate a good outcome for themselves in an acquisition, even if the acquisition is disappointing. For example, the CEO of Practice Fusion, a medical-records startup which recently sold to AllScripts for $100 million—significantly less than its last reported valuation—is set to make millions in the deal while mid-level employees’ shares were worthless. The company has had as many as 450 employees but had shrunk to half that by the time of the sale.
Likewise, student-loan start-up Earnest was sold for half of its last private valuation in October. Employees, some of whom paid thousands of dollars in taxes to exercise their stock options, got nothing in the sale. But CEO Louis Beryl and co-founder Ben Hutchinson negotiated a package of up to $10 million each including earn-outs as part of the deal, according to several people familiar with the situation.
Augmented-reality company Magic Leap was valued at $4.5 billion following a 2016 round of funding. But the funding came with strings: some shares are granted seniority over others in a sale, and certain investors are guaranteed a payout in an IPO. Considering those factors, the study estimates that Magic Leap should have been more fairly valued at $3 billion, one-third less.
How Overvalued Are the Unicorns?
A study conducted found that many private companies valued at more than $1 billion should carry smaller valuations, because they conditions attached to some of their shares make other shares less valuable.
It’s always worth remembering that many tech unicorns haven’t ever turned a profit. Although they often have large amounts of revenue, much of their value is based on funding from investors – and this money won’t necessarily keep coming.
For example, former unicorn Snapchat – which has since gone public – has never been a profitable business. Similarly, despite its expansive international network and huge valuation, Uber reported almost $ 3 billion losses in 2017.
But what the valuation game has done is it has made being an entrepreneur an enterprising job in developing countries like India and China and this is prompting creation of hundreds of startups and eventually to the creation of the Unicorns…
Looking forward to seeing my friends Ashwin and Mukesh whom I mentioned about at the beginning enter this elite 1-billion-dollar club soon…
