Unicorn Startups: Myth, Legend and Reality
Unicorns: the mythical creatures of European folklore described since antiquity as a beast with a single, large pointed horn projecting from the forehead and touted as possessing mystical magical powers. These creatures born of legends and fables recently found a place in corporate jargon in 2011 when the founder of CowboyVC Aileen Lee published an article titled “Welcome to the Unicorn Club: Learning from Billion Dollar Startups.” These ‘billion dollar’ startups were referred to as ‘unicorns’ not only because of the cultural fantasy but also due to statistical rarity. Lee noted that out of all the software startups founded in the 2000s, only 0.07 percent could reach a $1 billion valuation. Finding a successful (privately-held) billion dollar startup was as difficult as finding the mythical unicorn.
In the very same article, Lee opined that the first unicorns were actually started in the 1990s. She used the example of Alphabet (later Google) that gradually emerged as a super-unicorn with a valuation of around $100 billion. Many unicorns followed but Facebook remained as the only super-unicorn of the 2000s. Since the publication of Lee’s article, the term has been popularly used to talk about high-valuation startups in the domains of software, mobile technology and information technology. Although unicorns were termed so because of their rarity, they seem to have become a regular feature in business and finance discussions. Some familiar US-based unicorns include SpaceX, WeWork, Pinterest, Uber and AirBnb. China is close behind with gems such as ByteDance (owner of Tiktok), Xiaomi and Shein. India seems to be gradually catching up with the world with highly valued companies such as Paytm ($18 billion), OYO Rooms ($10 billion) and Swiggy ($3.3 billion). As of January 2020, there exist a total of 450 startup unicorns in the world and 21 in India. The 21 unicorns of India hold an approximate valuation of $73.2 billion.
Is the picture truly as rosy as it looks? Perhaps not.
A fundamental issue with startup unicorns is that their valuation is closely based on long-term forecasting than financial performance that tends to throw traditional risk analysis off the charts. Many of these companies rarely generate any profits when they start off. Investors often face hurdles with new-age first-of-its-kind projects; with no previous business model or existing competitors to compare the startup with, the valuation can tend to become a complicated process. Overnight success is rarely sustainable and such is the case with these unicorns. If Unicorn Startup Failures were to be compiled in a book, Evernote would be the very first chapter. Founded in 2004, this digital note-taking company hit its first billion in very little time. The idea was interesting and the team noteworthy but things spiralled down quickly. Experts cited freemium marketing and product stagnation as two of the biggest reasons why the startup failed to grow at the pace it chose. Yet another example that comes to mind is Zynga – the parent company of Farmville. With its addictive Facebook in-game, Zynga rose to prominence in 2011 and entered the club with a staggering $7 billion dollar valuation. Over the next few years, however, Zynga continued to lose executives, revenue and market capitalization reducing itself to a shadow of its former gigantic self.
The most interesting and telling unicorn failure, however, is perhaps that of Theranos: a case study in the dark side of unicorns. Theranos was a privately-held healthtech corporation launched in 2003 by 19 year old Elizabeth Holmes. Touted initially as a breakthrough company, the organisation claimed to have devised disruptive technology such as blood tests that required very little blood and could be performed quite rapidly using tiny automated devices. Theranos raised more than $700 million from venture capitalists and private investors and was valued at $10 billion in its peak. Overhyped to both the investors as well as the United States media, the company soon met its downfall when a team of medical research professors questioned the validity of Theranos’ technology. The company was met with a string of challenges from the medical community followed by commercial lawsuits. It soon came to light that CEO Holmes was overtly deceiving investors and consumers with her largely non-existent technology. In 2018, two Theranos leaders were officially indicted by a federal grand jury on nine counts of wire fraud. The company shut down two months later rendering all valuations worthless.
In summary, The Unicorn Game is a relatively new phenomenon and its long-term economic and financial implications are subject to close scrutiny over the next few decades. Economists do sense a bubble but analysts are optimistic. This scenario can, in a sense, be likened to the “dotcom bubble” of the late 1990s. Business analysts often argue that the large number of companies with high valuations is a clear sign of ‘market froth’ and have a great chance of proving to be a burden for investors. Backing the right horse (unicorn?) is a matter with little mathematical assurance. The opposite side of the debate expresses firm belief in the culture of unicorn startups emphasizing the importance of technology in increasing human productivity. The surge of unicorns is directly linked to consequential advancements in history akin to the invention of the printing press or the steam engine. Much like their historical counterparts, unicorn startups are destined to set off a chain of events that are bound to recreate the future of the world. A third and rather interesting perspective in the argument points towards the role of global monetary policy, liberalization and globalization. It is surmised that there exist great waves of capital waiting to nurture and reproduce generations of unicorns.