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How to spot a unicorn?

By July 7, 2022August 17th, 2022No Comments

In the business world, the term “unicorn” refers to a start up company that is valued at 1 billion $ or greater.

The term unicorn was first used by Aileen Lee, a U.S. venture capital angel investor. It refers to these types of companies being so rare that it is almost mystical. So what are unicorns and how to spot them?

The chances of becoming a unicorn are 3 in every 5 million companies. Facebook was one and when Facebook bought Instagram for 1B$, Instagram became a unicorn overnight. So it is about past performances, growth opportunities, market potentials, and how they are valued…

There are a few common characteristics of unicorns. Namely, they usually redefine their area of work. Thinking of Netflix, Grammarly, and Airbnb, this makes sense since they provided a unique solution to problems we didn’t know we needed. Secondly, they are pioneers. For example, Facebook was one of the first social networks, followed by many more. Unicorns are companies with unique, brand new ideas and strong leaders. It usually grows from VCs that adopt the first-mover advantage and “get big fast” strategies. By doing so, they plan to step ahead of their rivals in the market as soon as possible.

In 2013, there were only 39 unicorns spotted. However, just in 2018, 16 U.S companies became unicorns and now, there are more than a thousand of them. So what caused this rapid increase?

Looking into unicorns, we see a tech, software pattern. It is now well known that there is more room for innovation in the technology sector. Also, there are fewer costs in writing a code rather than actually manufacturing a product, encouraging more tech startups to enter the market. Moreover, effective usage of social media also increases recognizability and helps create a stronger company identity that attracts more users and potential investors, leading to exponential growth.

Another reason that helped the increase of unicorns is that they can avoid IPOs which sometimes limits their growth and valuation. There are various examples such as the case of Trivago or Uber in which IPOs led to a lower valuation of the company, resulting in a decrease in the stock prices. Instead, unicorns can stay in touch with their initial or potential investors and maintain their values.

After all, it is not magic that creates a unicorn. It takes dedication, thinking outside the box, courage to redefine a concept, solid management, and an investor.

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