A unicorn is a privately held startup company valued at over $1 billion.^[1] The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.^[2][3][4][5] Decacorn is a word used for those companies over $10 billion,^[6] while hectocorn is used for such a company valued over $100 billion. According to TechCrunch, there were 279 unicorns as of March 2018.^[7] The largest unicorns included Ant Financial, DiDi, Airbnb, Stripe and Palantir Technologies.^[8] Lyft is the most recent decacorn that turned into a public company on March 29, 2019.

When Aileen Lee originally coined the term "unicorn" in 2013, there were only thirty-nine companies that were considered unicorns.^[9] In a different study done by the Harvard Business Review, it was determined that startups founded between 2012 and 2015 were growing in valuation twice as fast as companies from startups founded between 2000 and 2013.^[10]

In 2018, 16 US companies became unicorns, resulting in 119 private companies worldwide valued at $1 billion or more.^[11]

According to academics in 2007, investors and venture capital firms are adopting the get big fast (GBF) strategy for startups. GBF is a strategy where a startup tries to expand at a high rate through large funding rounds and price cutting to gain an advantage on market share and push away rival competitors as fast as possible.^[12] The rapid exponential returns through this strategy seems to be attractive to all parties involved. However, there is always the cautionary note of the dot-com bubble of 2000 and the lack of long-term sustainability in value creation of the companies born from the Internet age.

Many unicorns were created through buyouts from large public companies. In a low interest rate and slow-growth environment, many companies like Apple, Facebook, and Google focus on acquisitions instead of focusing on capital expenditures and development of internal investment projects.^[13] Some large companies would rather bolster their businesses through buying out established technology and business models rather than creating it themselves.

The average age of a technology company before it goes public is 11 years, as opposed to an average life of four years back in 1999.^[14] This new dynamic stems from the increased amount of private capital available to unicorns and the passing of The US Jumpstart our Business Startups (JOBS) Act in 2012, which increased the amount of shareholders a company can have by a multiple of four before the company had to disclose its financials publicly. The amount of private capital invested in software companies has increased three-fold from 2013 to 2015.^[15]

Through many funding rounds, companies do not need to go through an initial public offering IPO to obtain a capital or a higher valuation; they can just go back to their investors for more capital. IPOs also run the risk of devaluation of a company if the public market thinks a company is worth less than its investors.^[15] A few recent examples of this situation were Square, best known for its mobile payments and financial services business, and Trivago, a popular German hotel search engine, both of which were priced below their initial offer prices by the market.^[16][17] This was because of the severe over-valuation of both companies in the private market by investors and venture capital firms. The market did not agree with both companies' valuations, and therefore, dropped the price of each stock from their initial IPO range.

Investors and startups also do not want to deal with the hassle of going public because of increased regulations. Regulations like the Sarbanes-Oxley Act have implemented more stringent regulations following several bankruptcy cases in the US market that many of these companies want to avoid.^[13]

Startups are taking advantage of the flood of new technology of the last decade to obtain Unicorn status. With the explosion of social media and access to millions utilizing this technology to gain massive economies of scale, startups have the ability to expand their business faster than ever.^[13] New innovations in technology including mobile smartphones, P2P platforms, and cloud computing with the combination of social media applications has aided in the growth of unicorns.

The valuations that lead these start-up companies to become unicorns and decacorns are unique compared to more established companies. A valuation for an established company stems from past years' performances, while a start-up company's valuation is derived from its growth opportunities and its expected development in the long-term for its potential market.^[18] Valuations for unicorns usually come from funding rounds of large venture capital firms investing in these start-up companies. Another significant final valuation of start-ups is when a much larger company buys out a unicorn and gives them that valuation. Recent examples are when Unilever bought Dollar Shave Club^[19] and when Facebook bought Instagram^[20] for $1 billion, effectively turning Dollar Shave Club and Instagram into unicorns.

Bill Gurley, a partner at Benchmark predicted in March 2015 and earlier that the rapid increase in the number of unicorns may "have moved into a world that is both speculative and unsustainable", that will leave in its wake what he terms "dead unicorns".^[21][22][23] Also he said that the main reason of Unicorns' valuation is the "excessive amount of money" available for them.^[24] Research by Stanford professors suggests that unicorns are overvalued by an average of 48%.^[25][26]

For high-growth companies looking for the highest valuations possible, it comes down to potential and opportunity. When investors of high-growth companies are deciding on whether they should invest in a company or not, they look for signs of a home run to make exponential returns on their investment along with the right personality that fits the company.^[27] To give such high valuations in funding rounds, venture capital firms have to believe in the vision of both the entrepreneur and the company as a whole. They have to believe in the company can evolve from its unstable, uncertain present standing into a company that can generate and sustain moderate growth in the future.^[18]

To judge the potential future growth of a company, there needs to be an in-depth analysis of the target market.^[18] When a company or investor determines its market size, there are a few steps they need to consider to figure out how large the market really is:^[28]

After the market is reasonably estimated, a financial forecast can be made based on the size of the market and how much a company thinks it can grow in a certain time period.

To properly judge the valuation of a company after the revenue forecast is completed, a forecast of the operating margin, analysis of needed capital investments, and return on invested capital needs to be completed to judge the growth and potential return to investors of a company.^[18] Assumptions of where a company can grow to needs to be realistic, especially when trying to get venture capital firms to give the valuation a company wants. Venture capitalists know the payout on their investment will not be realized for another five to ten years, and they want to make sure from the start that financial forecasts are realistic.^[27]

With the financial forecasts set, investors need to know what the company should be valued in the present day. This is where more established valuation methods become more relevant.

This includes the three most common valuation methods:^[30]

Investors can derive a final valuation from these methods and the amount of capital they offer for a percentage of equity within a company becomes the final valuation for a startup. Competitor financials and past transactions also play an important part when providing a basis for valuing a startup and finding a correct valuation for these companies.

The sharing economy, also known as "collaborative consumption" or "on-demand economy", is based on the concept of sharing personal resources. This trend of sharing resources has made three of the top five largest unicorns (Uber, DiDi, and Airbnb) become the most valuable startups in the world. The economic downturns of recent years have powered consumers to learn to be more conservative spending and the sharing economy supports this trend.^[31]

E-commerce and the innovation of the online marketplace have been slowly taking over the needs for physical locations of store brands. A prime example of this includes the decline of malls within the United States. The sales of malls within the United States have declined from $87.46 billion in 2005 to $60.65 billion in 2015.^[32] The emergence of e-commerce companies like Amazon and Alibaba (both unicorns before they went public) have decreased the need for physical locations to buy consumer goods. Many large corporations have seen this trend for a while and have tried to adapt to the e-commerce trend. Walmart recently bought Jet.com, an American e-commerce company, for $3.3 billion to try and adapt to consumer preferences.^[33]

In support of the sharing economy, unicorns and successful startups have built an operating model defined as "network orchestrators".^[34] In this business model, there is a network of peers creating value through interaction and sharing. Network orchestrators may sell products/services, collaborate, share reviews, and build relations through their businesses. Examples of network orchestrators include all sharing economy companies (i.e. Uber, Airbnb), companies that let consumers share information (i.e. TripAdvisor, Yelp), and peer-to-peer or business-to-person selling platforms (i.e. Amazon, Alibaba).

Three out of the top 5 most valuable unicorns are based in China. The other two unicorns are headquartered in San Francisco.^[7]