EconomyFinancialWhat are unicorn companies and why do we care?

What are unicorn companies and why do we care?

Becoming a unicorn company is the dream of millions of entrepreneurs around the world. Why? This term, coined by Aileen Lee in 2013, designates those technology companies that reach a value of 1,000 million dollars, in less than 10 years, without having a presence on the Stock Market.

Aileen Lee, founder of Cowboy Ventures, analyzed how likely it is to find and fund one of those promising startups, so in 2013 she conducted research and found that only 0.07% of companies backed by private equity were evaluated on more than $ 1 billion. When Lee did his first count, there were only 39 unicorns in the world.

“I was trying to find a word that was easy to use, over and over again, for these companies. I played with different words like ‘home run’, ‘mega hit’, and they all sounded like ‘blah’. So I put ‘unicorn’ because they are – they are very rare companies in the sense that there are thousands of tech startups every year, but only a handful will end up becoming a unicorn company. They’re really weird, “Lee explains in his book Welcome To The Unicorn Club: Learning from Billion-Dollar Startups.

What characterizes a unicorn company?

Generally, being able to reach a valuation of $ 1 billion before the first decade of life depends on the ability of the company to develop a business model that literally revolutionizes an industry. There are three characteristics that experts say are shared by unicorns.

The customer always at the center:

develop a consumer centric business strategy. That is, they have the customer in mind before (ideation), during (manufacturing), and after (after-sales). User experience is key. Before, only the product was valued, but now the shopping experience is valued as much or more.

A global and accelerated expansion

:

Unicorns are born with a global mindset and follow a strategy of ‘getting big as quickly as possible’. Betting on internationalization and having a scalable model are key to achieving both objectives.

The diversity of the team

:

they are multidisciplinary and multicultural organizations. Therefore, they have very different professional profiles and that diversity is one of their strengths when it comes to generating disruptive ideas. In addition, they are young companies that value talent and creativity.

Although, at this time there are no real mathematical calculations to estimate the value of new companies – valuations are based in most cases on a company’s business potential and are simply rough estimates – there is a strong psychological difference in the value of new companies. Perception of a company when it reaches unicorn status: “One billion is better than 800 million because it is the psychological threshold for potential customers, employees and the press,” Lee said.

The global unicorn boom

Among the benefits of unicorn companies is that, being backed by investment funds, they can be kept private for much longer. In 2000, the average time before a startup made an IPO was three years, according to the National Venture Capital Association.

That number has jumped to six years in 15 years, in part because so many up-and-coming companies want to take advantage of the friendly estimating environment before going public. Additionally, the development of private markets has made it easier for unicorn shareholders to withdraw their investments without pressuring startups to go public.

Mexico, a land of unicorns?

The average minimum amount that a startup requires to reach the unicorn category is 300 million dollars, according to Ignia data. But until five years ago, this was a difficult amount to raise in Mexico because, in general, “local institutional investors do not like venture capital (or risk capital) very much, due to lack of knowledge and also due to a lack of knowledge. tremendous aversion to risk ”, said in a previous interview, Álvaro Rodríguez Arregui, managing partner and co-founder of Ignia.

“In Mexico there is very little funding for this type of project. While institutional investors outside the country have 5% of their capital invested in venture capital , in Mexico they barely have 0.15%. The industries of the last century still attract their attention, such as real estate, infrastructure, energy ”, he added.

In Mexico, before 2017, an entrepreneur did not raise more than $ 20 million. “They had to go out to raise capital rounds greater than this amount,” Jaime Zunzunegui, managing partner of Mountain Nazca, a capital firm, said in another interview. company focused on technological investments in Latin America. This caused Mexico to lag behind other markets in the region, such as Brazil or Argentina. Brazil, for example, has about a dozen unicorns.

Until October 2020, there was no Mexican stratup at this club. But the arrival of SoftBank in the region set off a cascade of investments. The Japanese holding company has launched two investment funds for Latin American startups: Latin America Fund, created in 2019 with 5,000 million dollars, and Latin America Fund II of 2021, with 3,000 million dollars of capital. With them, SoftBank has invested in the vast majority of Latin American unicorns, among which Kavak, Rappi, Bitso, Clip and Konfío stand out, among others.

With information from Ivet Rodríguez and Puri Lucena

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