While the tales of unicorns are as varied as the cultures that produce them, the mythical animals are rare, unique creatures. In the world of venture capital (VC) or start-up investing, businesses that manage to reach a valuation of $1 billion are similarly rare. It’s because of that rarity that a venture-capital-backed private company -- or start-up, in VC lingo -- that manages to reach a valuation of $1 billion is referred to as a unicorn.
What is a unicorn company?
Thousands of small businesses are started every year, and few of their founders have ambitions to build a billion-dollar business. Most just have an idea that they think can create wealth or at the very least, a comfortable income.
But if you have bigger ambitions and need funding, you may look to find investors to help you fully develop your business plan. Whether it's angel investors who provide initial capital, or the giant venture capital funds that invest in dozens or even hundreds of start-ups, it's these "unicorn hunters" who provide the funding to grow your start-up from idea to billion-dollar business.
The VC industry exists to find the next big thing and own a portion of it. Companies that were initially funded by angel and VC investors and then grew to a business valuation of $1 billion or more are anointed unicorns.
Should you invest in unicorn companies?
Technically, a unicorn is no longer a unicorn when it goes public, and it may seem like the best money has been made by then. After all, they often go public so their VC backers can exit and take their winnings and move on to the next group of start-ups. In some cases, that's true; we've certainly seen our share of initial public offerings (IPOs) and special purpose acquisition companies (SPACs) in recent years where VC investors cashed out, and retail investors got washed out.
But sticking with the Meta Platforms example, remember that Thiel sold out at roughly $1 billion, leaving almost $54 billion in additional gains on the table. The unicorns that go public as profitable companies with durable competitive advantages can still be excellent investments for those of us who can only afford public stocks. You should look for signs that the company can make money without outside funding or that it has enough money on its balance sheet to cover cash burn until it gets cash-flow positive.
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