Business Magic: Unicorn Tech Startups

Written by Emily Zou on Wednesday, 22 November 2023. Posted in Business Analytics

Photo by S O C I A L . C U T on Unsplash  

According to the Harvard Business Review, today’s start-ups are growing twice as fast as they were just a decade ago. Take Open AI for example: In just four years since its initial investment by Microsoft, Open AI, creator of ChatGPT, and DALL-E, it has become one of the fastest growing private companies with a projected valuation of $80 billion by October 2023, serving 100 million active weekly users and joining the ranks of Silicon Valley’s ‘Unicorns’.

Though some may argue that the source of this ‘meteoric’ growth is artificial, it is undeniable that the rise of unicorn tech start-ups has dramatically shaped the entrepreneurial ecosystem, compelling investors to fund the AI revolution or more lacklusterly, leave with empty pockets. 

How is a Unicorn Defined?

The term “unicorn” in finance was coined by angel investor and founder of Cowboy Venture Aileen Lee in her TechCrunch article, Welcome To the Unicorn Club: Learning From Billion-Dollar Startups. Lee wanted to describe software companies that were evaluated to be worth over $1 billion by emphasizing their rarity, innovation, and strength—magical, yet elusive qualities that captured just 39 companies or 0.7% of all venture-backed tech startups at the time of publication (2013). Lee found that on average, just four unicorns were born per year. On the extreme end of that spectrum, super-unicorns worth over $100 billion such as Google and Facebook emerged on a decade-by-decade basis, exploiting each major wave of technological innovation: the semiconductor, the personal computer, the internet, social networks, etc. 

What Makes Unicorns so Special? 

Unicorns typically fall into four business models. These include e-commerce, where the consumer pays for goods and services, audience; where the consumer watches ads for a free service; Saas (software as a service), where users pay for cloud-based software; and enterprise, where companies pay for larger-scale software. Half of the initial 39 unicorns also tapped into network effects, increasing its value simply by attracting more users to its services via digital platforms. Even today, word-of-mouth marketing proves effective as millions of internet users help advertise products and services through Facebook, Twitter, Snapchat, Pinterest, etc. through three clicks and a ten-word long endorsement. 

It also helps that 80% of unicorns demonstrate entrepreneurial DNA, with on average, at least one co-founder previously holding another company. Familiarity and trust are two other important factors in launching a successful tech startup, with an overwhelming 90% of unicorn co-founding teams reporting years of history in working together. 

How Rare are Unicorns Today? Do They Still Exist?

According to CB Insights, as of April 2023, there exists more than 1,200 unicorns today and the hottest specializations are in E-commerce, Fintech, and Internet Software & Services. Over half of Unicorns are based in the U.S. although the world’s most valuable private company is China’s ByteDance worth $225 billion from its ownership of TikTok. Following ByteDance in valuation are astronautics company SpaceX at $137 billion, fast fashion company Shein at $100 billion, generative AI company Open AI at $80 billion, and payment services provider Stripe at $50 billion. 

Though the founding of 40% of all unicorn companies in just the last two years may suggest that these supposedly magical start-ups aren’t so rare anymore, the first quarter of 2023 marked the lowest number of unicorn births in six years with 18 new unicorns minted, compared to the founding of 163 unicorns in both the third and fourth quarters of 2021. At the same time, critics of the unicorn hype argue that this decline in start-ups can be attributed to the burst of the tech bubble, in which the value of a tech company’s stocks vastly exceeds its fundamental worth as investors indulge in wishful market speculation. Thus, the $1 billion price tag attached to these unicorns may not reflect their actual potential and investors are believed to be overpaying for stakes in companies that simply won’t deliver; according to the National Bureau of Economic Research, unicorns are roughly 50 percent overvalued. This disconnect between potential and reality has led some to believe that unicorn companies do not exist and are, in fact, mythical beasts.

About the Author

Emily Zou

Emily Zou

Emily is a Business Analytics Writer at Girls For Business.

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