What is a unicorn company?

Unlike the mythical creature, a unicorn company does exist. But what exactly is this rare entity and how does it work for investors?

Head shot of a white unicorn against a clear blue sky.

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What is a unicorn company?

A unicorn company is a privately held start-up business valued at more than $1 billion. In other words, the company has reached the valuation of $1 billion without being publicly listed on any stock market. 

Unicorns derive their value from the valuations of investors who participate in the financing rounds of these companies. Since all unicorns are start-ups, investors base their value primarily on growth potential and expected development.

Creating a unicorn company is considered a significant achievement in the start-up world. It demonstrates that a company has successfully raised significant amounts of capital and has a promising future (hopefully). 

Although it isn't necessary, many unicorns eventually work their way to going public. However, it's worth noting that not all unicorn companies succeed in the long term, and many fail to meet the high expectations set by their valuations.

What is the origin of the term?

The term 'unicorn' was first coined by venture capitalist Aileen Lee, who wrote about unicorns in an online article for TechCrunch in 2013.1

In her article, she looked at software start-ups founded in the 2000s, estimating that only 0.07% reached $1 billion valuations. According to Lee, start-ups that reached this mark were so rare that finding one was as difficult as finding the mythical creature. 

Lee estimated four unicorns had been born per year over the previous decade. Meta Platforms Inc was the breakout 'super unicorn' (worth more than $100 billion when listed as 'Facebook' in 2012). But at a conservative estimate, some 60,000 tech companies were established over that period, meaning only one in every 1,538 became a unicorn.  

Nonetheless, Lee found that each significant wave of technological innovation – from the birth of the personal computer in the 70s, the dawn of the modern internet in the 90s, and the dominance of the new social networks in the 2000s – gave rise to one or more super unicorns. Think Apple, Oracle, Microsoft, Amazon, Google, and Meta. 

What are the world's top three unicorn companies?

The most valuable unicorn companies in the world (and the only 'hectocorns' with valuations above $100 billion are: 

  • Bytedance: Valued at $140 billion, it is the company behind the social media phenomenon TikTok. 
  • SpaceX: Valued at $125 billion, it is the most valuable American unicorn company; and 
  • SHEIN: Valued at $100 billion, it is a fast fashion and e-commerce retailer.

Smartphones and cloud computing have allowed unicorns such as Uber Technologies Inc and Airbnb Inc to penetrate traditionally tech-averse industries, from taxis to hotels. 

The rise of 'super platforms' such as Facebook, TikTok, and the Apple App store means products can acquire a high volume of users faster than ever. With the surge in global mobile phone use, companies can connect with customers anywhere and anytime. 

Are there unicorn companies in Australia?

Australia is home to several unicorn companies. These include: 

  • Canva: A software and services business with a valuation of $40 billion 
  • Airwallex: A fintech providing a single platform for cross-border payment needs, valued at $5.5 billion
  • Immutable: Provides software used to build video games, valued at $25 billion
  • Go1: Has a software platform that allows users to train staff or customers, valued at $2 billion 
  • SafetyCulture: Provides a mobile app and platform that puts safety and quality applications into workers' hands and has a valuation of $1.6 billion 
  • Culture Amp: Provides software that powers the employee experience and has a valuation of $1.5 billion 
  • LinkTree: A software tool that allows users to share multiple links on social media, valued at $1.3 billion
  • Pet Circle: An e-commerce and direct-to-consumer pet needs business with a valuation of $1 billion. 

What was Australia's first unicorn?

David Shein founded Australia's first unicorn — Com Tech Communications. Over time ComTech became Australia's largest network integration company, with 1,400 staff. It was sold to a South African tech firm in 2000 for an enterprise value of $1.1 billion, making it Australia's first unicorn. 

David Shein advocates the idea of entrepreneurs surrounding themselves with smarter people and delegating responsibility for technical matters. He personally lacked technical knowledge of computer networking but solved this problem by hiring an expert, proving you can build a tech unicorn without having high-level tech knowledge yourself. 

Much has changed from a technology perspective since Australia's first unicorn was sold 23 years ago. 

Yet, in some ways, nothing has changed. You will always have customers, staff, and business partners. How you treat these constituents can be the difference between a good company, a great company, or a company that simply disappears.

What are Shein's five lessons?

Shein measured the success of ComTech against five key performance indicators, and he advises the start-ups he invests in to do the same. 

These are: 

  1. Market standing 
  2. Innovative performance 
  3. Digital transformation 
  4. Profitability 
  5. Cash flow.

Shein also emphasises the importance of sales growth, noting: "Nothing happens until you sell something."

Pros of investing in a unicorn company

Investing early in what becomes a successful business can be very satisfying for investors. Other benefits of investing in potential unicorns include: 

Potential returns: Investing in a successful start-up can provide supercharged returns for those who get in early. 

Hands-on potential: Early-stage private ventures may have just a handful of investors to begin with. These investors tend to be closer to, and even have a say in, the venture's strategy and management. 

Excitement: Backing a small unlisted venture that develops into a larger, potentially listed company can be a source of personal satisfaction. Backing early-stage ventures also allows investors to support Australian innovation and entrepreneurship.

Diversification: Private equity as an asset class has a less-than-perfect correlation with listed Australian equities. Fluctuations in the stock market have less impact on unlisted securities, which can aid portfolio diversification

Professional managers: Investors who seek exposure to unlisted companies via venture capital funding benefit from the expertise of experienced managers who can be skilled in identifying, assessing, valuing, and monitoring emerging ventures. 

What are the drawbacks?

Investing in start-up companies is not for the faint of heart. Many early-stage companies never become profitable and fail. Some return on their original investment. Only a few will deliver really big returns. 

Investors seeking the next unicorn should consider the following: 

Risk: This type of investment is high risk. Only one or two in every 10 start-ups will become successful enough to generate significant returns. 

Liquidity: There are no ready markets for unlisted shares, so if investors want to cash out, they may find it challenging to find a buyer. They may also have to wait for liquidity events such as a merger or initial public offering (IPO) to access their investment.

Reporting and disclosure: Private (unlisted) companies are not subject to the same disclosure requirements that apply to public (listed) companies. This may mean investors receive less or poorer-quality information. 

Hype: All start-ups need a compelling story to attract investment, but investors must look beyond the hype. Professional investors and wealthy families often support the most promising emerging ventures. 

Control: Investors in small start-ups may have very little ability to influence the direction of the venture if they do not have majority control. The founder will usually have majority control, and their interests may not align with those of minority shareholders.  

Are there any former unicorns listed on the ASX? 

There are currently no former unicorns listed on the ASX. Afterpay was the latest, until its takeover by Block Inc (formerly Square) in late 2021, a deal that ultimately valued the buy now, pay later company at $13.9 billion in stock. 

Atlassian Corp was another Australian tech unicorn, reaching a $1 billion valuation long before it listed on the NASDAQ for $6 billion in 2015. It now has a market capitalisation of about $40 billion. 

Investors are now looking to the next round of potential unicorns to build their fortunes. 

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This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Motley Fool contributor Katherine O'Brien has positions in Alphabet and Apple. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Airbnb, Alphabet, Apple, Atlassian, Block, Meta Platforms, Microsoft, and Uber Technologies. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended Airbnb, Alphabet, Apple, and Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.