You’re probably wondering what makes a unicorn startup. The simple answer is financial: reaching a $1 billion valuation. You can reach that milestone through the public markets when you complete an IPO (initial public offering). Alternately, some unicorn startups achieve this special status while seeking funding from venture capitalists.
1 How is a unicorn startup valued?
That is the billion-dollar question!
There are two approaches to valuing a company. The best approach is to estimate a value based on earnings. This is the valuation approach used for publicly traded companies like Salesforce ($199 billion market capitalization), HubSpot ($18 billion market capitalization). Find out how Salesforce’s growth combines paid and organic marketing. Unfortunately, a large number of startups lose money, so there are no earnings to analyze. Further, the conventional definition of “unicorn startup” focuses on private companies that usually do not disclose their financial data, so we can’t use audited financial statements.
The alternate approach is to value a startup based on different factors such as investor willingness to pay for a share in these companies in the private market of venture investing. That’s why you often see headlines about Series A, Series B, and Series C transactions involving private capital articles announcing that a particular startup has a “valuation” of a billion dollars. Private market investors, in turn, base some of their decision on a company’s future prospects for growth and other factors like the quality of the startup founder’s vision. For example, if a startup is adding users at a high rate, it might be valuable.
2 How many companies are in the unicorn startups club?
CB Insights estimates that there are 518 unicorn startups globally, with a large amount in the United States. That means that unicorn status is a statistical rarity out of the thousands of startups founded every decade. In early 2021, the following companies joined the unicorn startup club:
- MadeiraMadeira, a Brazil-based e-commerce company, has an estimated valuation of $1 billion. The company was established in 2008.
- Lacework, a US cybersecurity startup, has an estimated valuation of $1 billion. Lacework was established in 2014.
- Quantum Metric, a US data management startup, has an estimated valuation of $1 billion. The cybersecurity startup was founded in 2011.
- Dremio, an American startup in data management and analytics, has an estimated valuation of $1 billion. Dremio was founded in 2015.
Did you notice a trend in the above examples? The average age of these companies is over five years. Chasing such a valuation might be a worthwhile long-term goal. However, it will not guide you on what to do this year or this quarter. Attaining a billion-dollar valuation is much easier if you have an engine of growth in place to bring more users and customers to your platform.
There are also “mega” unicorn startups like Airbnb and Uber, which were valued at tens of billions of dollars while still private companies. These firms are sometimes called decacorns (i.e., a valuation over $10 billion). Today, these companies are more concerned about their stock price because they’ve moved to the public markets.
3 What percentage of startups become unicorns?
You’re not going to like the answer. Please sit down and take a deep breath.
Startups have approximately a 1% chance of achieving a billion-dollar valuation, according to research cited by EJ Insight. Yes, it is true that TechCrunch has observed the total number of unicorn startups has increased in the 2010s in absolute terms.
Out of every 100 startups that are founded, outcomes may include:
- 1% of startup companies achieve a billion-dollar valuation
- 30% of companies exit through an initial public offering (IPO) or merger and acquisition (M&A) deal
- 67% of companies “become self-sustaining” or “end up dead.”
I don’t know about you, but I would be happy with building a business worth tens or hundreds of millions of dollars. No law states you must aspire for a billion-dollar valuation.
4 What regions have the most unicorn startups?
San Francisco and California are home to the largest number of unicorn startups. Zooming out a level, the US remains one of the best places to create fast-growing technology companies. That said, I’d be remiss if I didn’t mention Shopify, a Canadian e-commerce software company, here.
There are also growing numbers of unicorn startups in China. CNN has reported that there are more than 200 such companies in China as of 2019. That means more competitors for investor time and capital.
5 Are there unicorn startups outside of California?
Yes, there are unicorn startups in other regions and countries. Here are some examples to prove it:
- Checkout.com (United Kingdom) – reached a $15 billion valuation in fintech (i.e., payments)
- Grab (Singapore) – reached a $14 billion valuation
- Canva (Australia) – a graphic design software tool that has an estimated value of $6 billion
- TransferWise (United Kingdom) – a payment technology company estimated to be worth over $5 billion
- Pointclickcare (Canada) – this startup is worth over $4 billion. Pointclickcare also regularly makes headlines in Canada as one of the country’s fastest-growing companies.
Dozens of Chinese startups have reached a billion-dollar valuation.
6 Are there B2B unicorn startups?
Many of the best-known startups with a billion-dollar valuation are aimed at consumers. However, the tech industry also has plenty of successful B2B software startup companies worth billions of dollars. Let’s take a look at some of the market’s most successful B2B startups
- Klaviyo, a marketing automation startup firm, is worth over $4 billion
- Freshworks, a customer service cloud startup, is worth over $3 billion
- SentinelOne, a cybersecurity startup firm, is worth $3 billion
B2B software companies have a growth advantage. If you follow in the footsteps of companies with $100,000 annual contract value (ACV) like Braze and Lotane, it is much easier to reach $1 million and then $10 million in annual recurring revenue.
7 Are you building a real business model?
Chasing unicorn status is tempting. After all, it is one of the best ways to get media coverage in outlets like Tech Crunch. That’s not all. Unicorn status may help you recruit talent from other businesses and impress venture capital funds. However, a “growth at all costs” mindset may lead you to develop unhealthy habits like discounting your product. Ultimately, you might fail to build a sustainable business.
Building a business that hits the $1 billion valuation mark is difficult. However, the single-minded pursuit of “unicorn startup status” is unhealthy. After all, you could achieve that milestone by spending hundreds of millions of dollars on your cost of customer acquisition. Or you might reach unicorn status by telling a good story about your startup.
Ultimately, my definition of a real business model comes back to the fundamentals. First, does the product add value or solve problems for real people? Second, can the company operate at a profit? Profitable software companies like Oracle, Microsoft, and Salesforce pass those tests.
Aspiring Unicorn Startups: Do This Next
Tech companies cannot assume rapid growth will happen automatically. Sure, charismatic leadership and ideas helped WeWork to grow. However, the company’s pursuit of growth and leadership problems contributed to its collapse. If you want to build a more valuable business over time, it is vital to invest in marketing to create value. Yes, hiring a small army of sales professionals will help you to attract customers this quarter. However, you also need marketing to inspire people to contact you. If you want more inbound leads, contact me to discuss your marketing goals.