What are Unicorns?
Again and again you can read that a young company has reached the status of a Unicorn. But what exactly is behind its inclusion in the Olympus of the most successful startups? What is so magical for founders and investors about this target of being a unicorn?
In order for a startup to be called a unicorn, a number of requirements must be met.
Firstly, a startup is only designated as Unicorn if it has exceeded the USD 1 billion post-money valuation in a financing round.
A second characteristic is when the USD 1b valuation is reached and the startup is not yet listed on the stock exchange.
Only a few, particularly innovative startups manage to be accepted into the illustrious club of Unicorns. A lucrative business model, sparkling product or service ideas and authentic, convincing founders are best prerequisites for success.
Of the 479 Unicorns worldwide, the following startups currently originate from Germany: Auto1 Group (valuation USD 3.54b), Otto Bock HealthCare (USD 3.5b), N26 (USD 3.5b), Celonis (USD 2.5b), Flixbus (2.25b USD), NuCom Group (USD 2.2b), wefox Group (USD 1.76b), CureVac (USD 1.3b), Deposit Solutions (USD 1.12b), AboutYou (USD 1b), Omio (USD 1b), Get YourGuide (USD 1b) and Lilium Aviation (USD 1b).
The most valuable Unicorn currently is the startup Toutiao (bydance) also known as TikTok. The valuation hit USD 75b.
Our relatively new MK Venture Fund of Funds portfolio (vintage 2018) has exposure to the Unicorns Epic Games (USD 15b) and SenseTime (USD 7.5b).
Why are Unicorns so important in a VC portfolio?
From a venture capital firm’s point of view, an investment in a startup that grows into a unicorn over time is an essential factor for a positive performance.
Let’s assume that the VC fund has a volume of USD 100m and is invested in 10 startups, i.e. USD 10m per startup. The stake in each startup is 10%. According to the statistics, 50% of the investments will be unsuccessful and, to simplify our example, achieve a value of 0. This means that the fund will lose USD 50m in capital.
On the flip side, only 2 or 3 startups will be successful in terms of multiples (>3x). If at least one startup goes from successful (3x) to unicorn (>10x), the fund will make a profit of USD 100m and can therefore pay back the capital invested to the investors. The other successful startups are responsible for theoverall fund return when exited.
Because of this mechanism, it should also be clear to all founders, that there has to be only one result, when examining the pitchdeck: The VC has come to the conclusion, that the startup is a potential unicorn.
We have published more about the mechanics of VC funds and how we use them for our selection strategy (click here). A more detailed study on the empirical results and the application of the Pareto principle in VC can be found here (german version).
Potential Unicorns or Unicorns of the future, are becoming increasingly popular. In these rankings, technologies and business models are subjected to a future test. However, the fact that these lists can only provide clues is due to rapid technological development.
When we take quantum computing as an example, this technology certainly has infinite profit potential if the market breakthrough should occur. There will then be practically no competition for the time being, because this technology is so complex in its development. At the same time, the applications will be able to break through previously known limits. But, it may be quite some time before this happens.
Despite all the euphoria for Unicorns: a valuation of more than USD 1b for a startup is still not a 100% guarantee that investors will make a big profit. The shares must still be placed on the stock exchange or sold to an investor.
Mato Krahl, 2020
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info@mk-vc.com
