What is a unicorn company?

Have you heard the term ‘unicorn company’ and wondered what it means? Victor Garrett takes a look at everything you need to know.

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Owing to the success of many venture capitalists, many investors want to back a unicorn company. If this is the first time you’ve heard the phrase ‘unicorn company’ or you’ve heard it but don’t know what it means, worry not. Let’s take a look.

What does ‘unicorn company’ mean?

A unicorn company is a privately-owned business or startup with a value of over $1 billion (£0.72 billion). Venture capitalist Aileen Lee is credited with the introduction of this term in 2013. The mythical creature represents the rarity of such success.

According to CB Insights, as of July 2021, there are more than 770 unicorn companies worldwide. The top company is Bytedance, an artificial intelligence company based in Beijing, China.

How many unicorn companies are in the UK?

Of the 770+ global unicorn companies, the United Kingdom is host to around 91. These companies are spread across various sectors, mainly cybersecurity, fintech, artificial intelligence and healthcare.

The most prominent unicorn company in the UK is Revolut, an e-money institution. It is valued at close to £24 billion.

In recent years, UK startups have been achieving unicorn company status faster than they had previously. Evidently, this has been driven by growth in the venture capital industry, providing these private businesses with a significant funding pool.

Additionally, the availability of business networks and mentorship early on has enabled these startups to accelerate growth and hit their potential. This has resulted in massive valuations within a couple of years of their foundation.

Furthermore, despite the effects of the COVID-19 global pandemic, the UK has seen a continuation of this trend. For example, 11 new privately held companies attained unicorn status between January and July 2021.

How are unicorn startups valued in the UK?

The valuation of a unicorn startup is not a straightforward process. In fact, if a business is the first of its kind in an industry, this can really complicate the valuation process.

Keeping that in mind, valuers derive the valuation of a unicorn company in the most recent round of funding. It isn’t expressly tied to the company’s financial or fundamental data. Instead, the value is based on potential growth and expected development.

It is also important to note that despite the high valuations of unicorn companies, most of them are yet to profit. For this reason, investors who put their money into these businesses take a long-term view. They weigh the investment risk against the future potential of the company.

As with any investment, sometimes the risk does not pay off. For example, according to Forbes, Softbank lost about £3.29 billion after the struggles of WeWork in 2019.

Should I invest in a unicorn company?

As with any investment, investing in a unicorn company carries a level of risk. The decision is ultimately yours.

Beware of fake unicorn companies. Some companies over-hype their valuation to attract more capital from unsuspecting investors.

More importantly, knowing where to find the most likely winners in the UK could be a huge benefit. For example, three out of four unicorn companies are based in London. They benefit from close to 70% of the UK’s private equity and high-level talent pool.