Over the last few years there has been a wave of astronomical valuations of companies in the software/ICT field. And the number of firms worth over $1 billion – dubbed ‘Unicorns’ – is steadily growing.
Welcome to the Unicorn Club, an exclusive circle reserved for US-based software and information & communication technology companies founded since 2003 that are each valued at over $1 billion by public or private market investors. The term ‘Unicorn’ was coined in 2013 by Aileen Lee, founder of seed stage fund Cowboy Ventures, which built up a database on US-based tech companies started since January 2003. Leading the pack in value terms is Facebook, followed by LinkedIn, Twitter and Groupon among the best known. At that time Cowboy Ventures listed a total of thirty-nine companies and identified four distinct business models: E-commerce; Audience, i.e. free for consumers, with monetisation through ads or leads; Software as a Service (SaaS); and Enterprise, where companies pay for larger-scale software. Between 2003 and 2013, four Unicorns were born each year. But in the last two years, the ICT landscape has changed substantially, and the number of companies regarded as Unicorns – on the basis that this mythical creature is extremely rare and very special – is now growing. In 2015, the number doubled. US business magazine Fortune has now cast the net wider than Cowboy Ventures’ software-based companies, and has come up with a list of 80, a figure that is still rising.
A Unicorn bubble?
The rapid rise of very young companies with gargantuan valuations is linked to the mass adoption of smartphones and the burgeoning capacity of processors, sensors and cloud technologies. The Unicorn bubble may be said to have begun with Facebook’s Initial Public Offering (IPO) on the stock market in 2012, which gave it a market capitalisation of $102 billion. This was seen as a significant milestone in the history of the Internet and in fact this valuation makes Facebook something of a ‘super Unicorn’. Many venture capital firms that had long been reluctant to invest in Facebook were taken by surprise and somewhat chastened by this high-value IPO. Perhaps as a consequence, investors are no longer so hesitant about taking a big stake in a promising startup. California-based law firm Cooley LLP points out that between 2012 and 2014, the average amount of capital raised in Series A investment rounds increased by 135%. Meanwhile, the US National Venture Capital Association – a trade association representing the venture capital industry in the US – reports that software/Internet sector investments in 2014 were higher than in any of the previous thirteen years.
The rapid growth of the Unicorn era is directly linked to widespread adoption of smartphones
The race for billion dollar valuations
It is interesting to compare this Unicorn era with the Internet bubble of the 1990s that gave birth to Google and Amazon. These companies never reached the dizzy heights of a billion dollars before they launched on the Stock Exchange, whereas most of the current Unicorns – Uber, Airbnb, Snapchat, et al – are still in private hands. According to US money management and institutional finance company Renaissance Capital, the number of IPOs has fallen considerably over the last two years as private investors continue to invest more and more, and companies raise astronomical amounts of capital, as L’Atelier reported earlier this year. The title of Unicorn has clearly become a most coveted distinction in the ICT and Internet world, and startups are all aspiring to reach the one billion valuation mark. “It absolutely gives us credibility and the ability to hire some very important people,” explains Apoorva Mehta, founder and CEO of San Francisco-based on-demand grocery delivery company Instacart, which is now valued at over $2 billion. It seems likely that we will be hearing much more from Unicorns in the near future.