As you might know already, a unicorn is an legendary creature. A horse like animal with a spiraling horn projecting from its forehead.
But in business and investment the term unicorn is given to something else. In the world of business, startups, and finance, unicorns refer to specific companies.
The term was coined by Aileen Lee, a venture capitalist and founder of CowboyVC in a 2013 article, “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups”.
To qualify to be a unicorn, a privately held startup company should have a value of over $1 billion.
A unicorn does not mean that the company’s market value is $1 billion, remember : it’s privately held (not public). It means that the capital raised in exchange of equity, makes the value of total equity theoretically above $1 billion.
How can a startup have a valuation over $1 billion?
The valuations assigned to these companies often bear no relation to the company’s fundamental metrics, such as cash flow, profitability, or assets.
Why do investors care about such startups.
I quote Aileen Article:
Why do investors seem to care about “billion dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns. For example – to return just the initial capital of a $400 million venture fund, that might mean needing to own 20 percent of two different $1 billion companies, or 20 percent of a $2 billion company when the company is acquired or goes public.
How does valuation work ?