Unicorn Valuation – Reasons for the Abnormally High Valuation of Unicorns
In finance, “unicorn” is a term that describes a privately owned startup with a valuation of over $1 billion. The term was introduced by venture capital investor Aileen Lee (founder of Cowboy Ventures) in 2013 to describe rare tech startups that were valued at more than $1 billion.
Valuation of Unicorns
The valuation of unicorns is derived from valuations developed by venture capitalists and investors who participated in the financing rounds of the companies. Since all unicorns are startups, their value is primarily based on their growth potential and expected development. The unicorns’ valuation is not strongly related to their actual financial performance or other fundamental data. Note that despite their abnormally high valuations, many of the companies have yet to generate any profits.
Valuing unicorns is a sophisticated process that involves the consideration of various factors and the development of long-term forecasts.
Reasons for the Abnormally High Valuation of Unicorns
The unicorns’ abnormal valuations are typically justified by the following reasons:
Innovations in technologies allow the faster growth of startups. By leveraging the new technologies, unicorn startups manage to reach their customers faster and shorten the time required.
2. Fast-growth strategy
Nowadays, venture capitalists primarily rely on fastgrowth strategies for a startup’s development. Such strategies encourage investing large amounts of money in every round of financing, in order to capture the biggest possible market share as soon as possible, as well as to prevent the emergence of major rivals in the marketplace. Therefore, a unicorn company’s valuation skyrockets every next round of financing.
Currently, many promising startups do not meet the requirements for an IPO. Instead, tech giants such as Facebook or Google acquire many startups to diversify their business and to prevent potential major competitors from arising in the marketplace. Large companies benefit from the deals because they are able to acquire developed technologies instead of building something similar from scratch. The intense competition among the tech giants causes them to offer a significant premium that boosts the valuation of target companies, creating unicorns.
The article goes on to give the equation, essentially pinning a valuation to four factors:
- What the founders think their company is worth, largely based on competitors.
- Actual revenue growth or potential thereof.
- Protection clauses for investors in case things head south
- Straight-up FOMO (fear of missing out). And they’re being serious.
According to the New York Times by CB Insights, a firm that tracks venture capital and startups, there are 326 private companies around the world valued at $1B.These companies are collectively worth nearly $1.1T and have raised a combined total of over $271B.
The US leads in share of unicorns (48%), China, in second place, (28%) Third and fourth place go to the UK (5%) and India (4%)
2018 saw the making of the largest number of unicorns in a single year in India. The most notable names among these were – Udaan, for being the fastest to enter the unicorn club; OYO, for its international expansion spree; Zomato, for gaining profitability; and Fresh works, for its new launches all around the year.
The year gone by gave the Indian startup ecosystem many crucial milestones and things to celebrate. With deeppocketed investors such as SoftBank, Alibaba, and Naspers, among others, being bullish on Indian startups BYJU’S is currently the fourth most-valued unicorn in India after Paytm, Ola, and OYO
Today, Uber and its peers are called “decacorns,” meaning they exceed $10 billion in valuation.
These startups which made it to the unicorn club and are now moving towards expansion and profitability serve as an inspiration to Indian entrepreneurs wishing to start their own ventures. Besides, the big-ticket funding they have garnered bore well for the Indian startup ecosystem at large.
Going forward, in 2020, the ecosystem will be looking towards these companies as pillars of success showing a guiding light to the upcoming generation of entrepreneurs.