Why are investors so addicted to the „high risk – high return” mantra, when many times it has doom written all over it? I guess we could say it is because money rules all. But is chasing unicorns worth losing all your cash?
What is a unicorn?
First used by Aileen Lee of Cowboy Ventures , the concept of a unicorn company means literally that: rare, very hard to trace and insanely valuable. Unicorns are privately held startups valued at more than $1 billion each, most of them being part of the fintech industry.
Although previous years have shown how difficult it is to spot such a business, nowadays we notice the emergence of decacorns which are worth $10 billion and even hectocorns worth $100 billion. On the other hand, there is another type of company that stands out: the so-called zombiecorn. It is an overvalued company who also delays its exit, preventing investors from selling their shares for profit. In layman’s terms, it is a company that stopped making any progress. Therefore, when hunting, beware of the unicorn that smells like failure.
How are they born and how do they grow?
Becoming a unicorn startup is not an easy task and feeding one is even more challenging. The chances of reaching an investor valuation of over $1 billion are pretty slim and reaching out to private equity funds, venture capital funds or corporate VC is tricky, because valuations are made by following the private market transactions trend. In the end, the truth is that the type of valuation a company aspiring to be a unicorn seeks, happens only to those that manage to transform the business’ idea into cash flow and profit. That’s the startup’s ticket to growth and, at the same time, the insight an investor needs to gain before putting money into the business.
How to identify one?
There are certain features that make unicorns stand out from the crowd – or herd:
- They are usually privately held.
- What they offer is extremely innovative and unconventional.
- Have a high user growth rate at a global level.
- They aim at global markets and are disrupting big industries.
The startup tracker, CBInsights, has a free-access list of all the unicorns around the world, along with data about their industry, valuation and investors. As of October 2021, there are 800 active unicorn startups around the world and the number keeps increasing. The list of tech startups across Europe is growing as well, with UiPath , Revolut and WeTransfer being just some of them.
Reasons to invest in a unicorn
A multibillion-dollar exit could be enough of a reason to invest in a unicorn startup. But great returns happen only if you play smart and bet your money on industries that show proven results (like fintech). Bigger exits mean bigger paydays and that is a tempting thought for investors. A rapid growth rate is another good reason for investing in such a company, as they are hooking users by operating under negative gross margins. At the same time, a unicorn is seen by investors as a highly risky venture with the potential of bringing in equally high returns. And money speaks after all, right?
Dangers of investing in unicorns
Valuations are like sea waves. They come and go. They can either leave you astonished and speechless or terrified and worried. If you like taking on huge risks, then hunting for unicorns is definitely a sport you would enjoy. If you are more of a strategic thinker, then do not put your money on the line until you analyze all the risks and benefits: some may have flawed corporate structures or precarious business models. Beware of the unicorn that is too charming.
Investing in a unicorn startup is only recommended if you would be able to deal with a total loss too, in case disaster strikes. You should never buy stock in a company only because you are familiar with its services or products. You have to assess the whole picture and foresee, if possible, future market prices fluctuations, because in the blink of an eye stock prices may drastically drop. Always be on your toes.
Beware of the unicorn
Going by the „high risk – high return” mantra is not for everyone. Those who have a taste for perils and who are capable of accepting failure are more prone to invest in such businesses and also have higher chances of spotting one, because they are actively seeking them. However, if you really want to put your money into a unicorn and as long as you do your homework thoroughly and assess all the dangers you might face, there should not be anything stopping you.
Juggler of words and wizard of controversial ideas, I am here to share with you the world of investors as it is and as it could be.
Putting together my B.A. in foreign languages, M.A. in international development and all the knowledge acquired through Mentori de Romania, I am here to show you that holding a pen – or in this case, typing on a keyboard – clicks with me best.
Juggler of words and wizard of controversial ideas, I am here to share with you the world of investors as it is and as it could be. Putting together my B.A. in foreign languages, M.A. in international development and all the knowledge acquired through Mentori de Romania, I am here to show you that holding a pen – or in this case, typing on a keyboard – clicks with me best.