ALL ABOUT UNICORNS
A Unicorn is an investing and business term for private startup entities in the economy with a valuation of over 1 billion dollar USD. Unlike the mythical creatures, unicorn are a very integral and real part of the modern business landscape. As of 2021, there are more than 750 verified and registered unicorns operating across the globe.
In the article below, we will have a closer look at exactly what a unicorn company is, how they develop and how it may fit into your investing journey and strategy. So let’s get started.
A unicorn is a private company with a valuation of USD 1 billion or more. While some unicorns operate under the radar for the consumers, others have become household names too. Ride sharing platform ola and uber can be referred to as a unicorn company as it was once a startup venture initiated back in around early 2010s. With its unique platform and the timing of which it was able to gain capital and popularity, uber continued to successfully receive funding amounting to around 50 billion USD in the year 2015.
WORKING OF UNICORNS
Most unicorns start as very small startups, just like virtually every other company in the world. Each startup has to raise capital to grow, succeed and eventually raise more funds and capital. Unicorns tend to see early success with customer revenue or growth and attract outside investments from major venture capital funds. Usually, investors in unicorns are private funds, direct owners, wealthy individuals or employees of the unicorns itself. In some cases, SEBI registered ETFs, mutual funds and business development companies may invest in the unicorns too.
To grow, a unicorn needs to raise funds from the investors in a series of rounds of funding. Investors offer to make a specific investment amount at a specific valuation - the value of the entity. With each successive funding round, the valuation of the company usually goes up and the purchase price per share also goes up accordingly.
DIFFERENT TYPES OF UNICORN
All unicorns are private entities, but there is no rule on what these entities can do. Unicorns often emerge from the fast growing tech sector but there is no reason a service, manufacturing or other kind of startup could not achieve unicron status. While most of the regular investors can not but into there pre IPO entities, you can find then in industries including:
- Artificial intelligence
- Consumer and retail
- Data analytics and management
- Internet services and softwares
- Telecommunication and mobile
MERITS OF A UNICORN
1. Vetted by investment professionals:
Unicorns gain their value from professional investment firms which specialise in identifying entities with good investment growth potential.
2. Growing Business:
Unicorns typically represent growing businesses that have displayed and demonstrated proven success over many years.
3. Tend to have a good business outlook:
Most new unicorns have built-in positive term outlook and growth assumption. Based on a series of funding rounds, unicorns are often expected to offer high returns.
DOWNSIDES OF UNICORN
1. Not easy to invest in:
Most retail investors can not invest funds into unicorn businesses as they are private entities. Usually, wealthy individuals i.e. HNIs and Private funds such as venture capitalists invest in unicorns.
2. Relatively high risk investments:
Startups on the way to unicorn status are typically risks to invest in the overall stock exchange specially for the retail investors. The securities tend to be illiquid or not easily sold for cash. Plus, it can be more challenging to get a hold of a unicorn's financial information to weigh the potential of the investment.
SIGNIFICANCE FOR RETAIL INVESTORS
In the case of public entities, individual investors can easily open a stock market demat and trading account to purchase or sell shares. Nevertheless, investing in private entities is often limited to HNIs as the risk is considered very high. Unless you are an HNI, you may not have many options in your bucket for investing in unicorn companies. If you are inclined in unicorn investing, consider investing in an ETF or mutual fund that focuses its funds on private entities. This could give you an exposure to the unicorn market without the wealth to get direct access.