By Vidya Hattangadi
In the venture capital industry, the term ‘unicorn’ refers to any start-up that reaches a valuation of $1 billion; Uber, Airbnb, Snapchat and Pinterest are some well-known unicorns. The term was popularised by venture capitalist Aileen Lee, founder of CowboyVC, a seed-stage venture capital fund based in Palo Alto, California. Lee is a US-based seed venture capital investor. The firm invests in US-based seed-stage companies operating in software, hardware, media and consumer service sectors.
The phenomenon of unicorns is quite controversial. Although some professionals believe that such companies are just a result of technological progress and innovation, others believe the increasing number of unicorns is a sign of a bubble in the industry; a bubble is an economic cycle that is characterised by rapid escalation of market value.
Valuation of unicorns is complex: Each unicorn today has its own story with a list of its strengths and weaknesses. Valuing unicorns is a sophisticated process that involves the consideration of various factors and the development of long-term forecasts. Additional complications often arise due to the business models of such companies. Some companies become the first business of their kind in an industry, which makes the valuation process even more complicated.
Creative destruction: Mostly, all the unicorns have brought a disruption in the field they belong to. Uber, for example, changed the way people commute. Airbnb changed the way people plan their stay in domestic/foreign destinations economically while travelling, and Snapchat allows users to take photos and videos, exchange them with family and friends, and chat, which disrupted the usage of the social media network to a great extent. Creative destruction is a process through which something new brings about the termination of something existing before it. Creative destruction is required for the progress of society. The term is used in almost all walks of life, such as medical science, economics and information technology and almost everything. The term was coined by Joseph Schumpeter, the Austrian political economist.
Unicorns are mostly ‘starters’ in their respective industry. They change the way people do things and gradually create a ‘habit formation’ for their products and/or services. They keep innovation up and running to stay ahead of competitors.
During the Covid-19 pandemic, young Indian start-ups such as Unacademy, Pine Labs, FirstCry, Zenoti, Nykaa, Postman, Zerodha, Razorpay, Cars24, Dailyhunt and Glance became unicorns. As experts have pointed out, the core proposition of these start-ups was that these actually solved challenges for individuals and businesses during the lockdown for a large portion of the year. For example, during the pandemic, online learning continued to rise and led to a boom in valuation for Unacademy; it had already set a good pace in 2019 and had caught the venture capital firms’ eyes. While students looked at catching up on test prep work, those working from home prepped their confidence. It also boosted business of other educational technology products.
Fintech apps such as Razorpay and Pine Labs boomed as online transactions for e-commerce and hyper-local services grew and contactless digital payments and even retailers jumped on to contactless payments. Digital payments saw a boom in the form of rapidly climbing UPI numbers since the lockdown in April last year. In November 2020, UPI transactions grew to 2.2 billion after crossing the 2 billion mark the month before. WhatsApp Pay processed 0.81 million UPI transactions worth Rs 29.72 crore, doubling its figure. In December, PhonePe processed transactions worth Rs 1.82 lakh crore, to lead the market with a 40% share. PhonePe overtook Google Pay after the latter had taken the lead in November 2020 as the most-used UPI app. The business model of unicorns is based on information technology. Uber got its model accepted by crafting a friendly app. Airbnb made the world seem a smaller place by making the best of the World Wide Web. A recent report notes that 87% of the products offered by unicorns are software, 7% are hardware, and the rest 6% are other products and services.
Unicorns adopt B2C model: 65% of the unicorns operate on the B2C business model. Their goal is to simplify and make things easy for consumers and be a part of their day-to-day life. Keeping things affordable is another key highlight of these start-ups. Spotify is a Swedish audio streaming and media services provider which made music lovers all over world cheerful because it made listening to music simple and easy.
Most of the unicorns are privately owned: Owners of the unicorns have a conviction in their idea and running the business. Most of the unicorns are privately owned, which gets their valuation bigger when an established company invests in it. India’s largest brokerage Zerodha turned a decade-old in June 2020; it formally claimed the unicorn status, ‘conservatively’ valuing itself at $1 billion as it announced an (ESOP) employee stock options buyback plan.
Widespread: CB Insights is a private company with a business analytics platform and global database that provides market intelligence on private companies and investor activities. According to this company, as of November 2020, there are 504 unicorns globally with a cumulative valuation of $1,592 billion. The US leads with 242 unicorns; China is second at 119; India and the UK are third and fourth with 25 and 24 unicorns, respectively.
For start-ups based out of Canada, there is an exclusive term for what we call a unicorn. It is ‘narwhal’—a Canadian start-up with a valuation of over $1 billion.
The author is Management thinker and blogger