Everything You Need to Know About Unicorn Startups

Aaron Vick - Everything You Need to Know About Unicorn Startups

Aaron Vick - Everything You Need to Know About Unicorn Startups

If you follow the world of startups, you’re probably already familiar with the concept of unicorn startups. After all, it’s the ultimate dream of many a startup founder for their venture to reach these heights – a valuation of $1 billion or more. There are plenty of household names in this exclusive club, from on-demand superstars like Uber and Airbnb, to social networks like Pinterest and Reddit, and even space exploration pioneers SpaceX.

However, it’s not easy to become this successful. It takes an uncommon mixture of innovation, business acumen, and a fair amount of luck to grow a tiny business into a formidable enterprise. And although unicorns are becoming more common as the years go by, new startups are still far more likely to fail than become unicorns. Even for startups who have successfully raised venture capital, the chance of earning such a high valuation is less than 1%.

If you’re wondering what startup unicorns have in common, the team at Total Processing have compiled all the essential data into the visualizations below. They’ve looked at everything from how long it generally takes a startup to become a unicorn, to the sectors that have the most success, and which countries have the most billion-dollar startups.

Where Are Unicorn Startups Founded?

The USA has been the powerhouse behind unicorn startups for many years, with 47% of all unicorn startups founded there. Whilst many other G8 countries like France, Japan, Canada, and Germany only have a handful of unicorns to their names, the USA has a staggering 119 startups worth a billion dollars or more. Its closest runner-up is China, with 76 unicorns, whilst the UK is in a distant third place with 15.

Startups in the USA have advantages that contribute to the country’s status as a forerunner for the startup scene. For one, the USA has the largest economy in the world by GDP, meaning startups there have a lucrative market to work with, and it’s also a fairly straightforward process to set up a business in many states.

Furthermore, the USA is home to world-renowned tech hubs like Silicon Valley, which is a flourishing business ecosystem that provides all the basic ingredients for success – particularly, easy access to venture capital, business infrastructure, talent, and networking opportunities. It’s no wonder that so many startups decide to set up shop there. In fact, California alone now has the world’s fifth largest economy, partly aided by its thriving tech scene (along with its booming entertainment industry).

However, despite the USA’s longstanding dominance in the startup scene, it’s clear that other countries are having more success in recent years and there’s a possibility that unicorns may become more evenly distributed across the world in the future.

This is shown by the practically meteoric rise of China’s tech scene – despite only having two unicorns in 2013, this number has now risen to 76 just five years later. The Chinese government has announced a focus on innovation and between March and June this year, Chinese startups claimed 47% of the world’s venture capital funding.

The Most Successful Startup Sectors

If you’re looking to start a business and want to pick a sector that gives you the best chance of becoming a billionaire, take a look at the chart below. This breaks down the most represented sectors in the current unicorn cohort:

From this, you can see that the top five most successful sectors are:

  1. E-Commerce –14.1% of startups valued at over $1 billion (e.g Houzz, The Hut Group, Wish, Flipkart )
  2. Internet Software & Services – 13.7% of startups valued at over $1 billion (e.g Slack, Canva, Squarespace)
  3. Fintech – 13.3% of startups valued at over $1 billion (e.g TransferWise, Stripe, Funding Circle, Kabbage)
  4. Healthcare & Biotech – 9.4% of startups valued at over $1 billion (e.g Human Longevity Inc, Grail, HeartFlow)
  5. On Demand – 7.8% of startups valued at over $1 billion (e.g Uber)

The Most Valuable Unicorns

Did you know that the 20 most valuable unicorn startups have a total value of over $395 billion? This combined value is higher than the GDP of most countries and is a staggering amount of money. In fact, only 28 countries in the world have a GDP that is higher than this, showing the immense value that can be assigned to successful tech businesses.

Even amongst the most valuable unicorns, there’s a big disparity in value. Uber, perhaps unsurprisingly, boasts the largest value at $68 billion. It maintains this high value despite recent quarterly losses of $1.1 billion and the fact it has not yet turned a profit. Its valuation dwarfs that of the twentieth biggest unicorn – Snapdeal, an Indian e-commerce company, which has a value of around $7 billion.

The Future of Unicorns

Unicorn numbers are very much on the rise, with more companies gaining their horns every year. As of August this year, there had been 65 newcomers to the unicorn club in 2018. Compare this to 2013, when there were only 13 unicorns worldwide (11 of which were in the USA), and it’s clear there has been a rapid increase in their numbers.

As unicorns become increasingly common, skepticism around them gained momentum. There’s a big desire in the startup and investment communities to gain unicorn status and all the glamour that comes with it – it’s a huge achievement, and helps to attract more funding and press coverage. These can then drive better consumer awareness and higher revenues.

However, some believe that this ambition can lead to overinflated values for startups, which may explain why unicorns have become much more common despite their rarity just a few years ago. Professors at the University of British Columbia spent some time researching the unicorn phenomenon and found that as many as 50% of the current cohort wouldn’t be worth $1 billion without the manipulation of complex stock mechanics.

In addition, they estimated that 1 in 10 unicorns may be overvalued by a staggering 100%. Share mechanics mean that some shares are worth more than others, but this isn’t always taken into account during valuations. Instead, all shares are assigned the same value.

Furthermore, many unicorns, like Uber, have never turned a profit. Partly, this is the nature of the industry – revenue is immediately funneled back into growth strategies, marketing, and further product/service development. The main focus tends to be growing a customer base rather than turning a profit as quickly as possible.

Tech companies are also taking longer to make an IPO – in 1999, businesses took around four years to go public. Today, that has increased to eleven years, as startups increasingly rely on private capital to grow.

All of these factors have led to growing concerns that there may be a startup bubble, which – like the dot-com bubble before it – could eventually burst and lead to many startups losing vast amounts of value practically overnight. Equally, we could see the growth in the number of unicorns as a positive trend, with promising implications for businesses and investors as the economy continues to improve. It seems that only time will tell!

Today’s guest post for the startup page was written by:

Rebecca Armstrong analyzes data and created some really interesting visualizations looking at the ingredients that create this success, including the countries and sectors which have the most unicorns, and how long it took each of the current cohorts of unicorns to earn their impressive valuation.