It seems nowadays unicorn businesses are emerging in the venture capital scene with accelerating frequency. With an increasingly mobile and technologically capable world, fin-tech companies and eCommerce startups are dominating most of the visible market now. Is startup growth really as proliferate and fast-paced as it may seem? The answer is an unsurprising, billion-dollar “yes”.
Unicorn Businesses: Far from a Myth
The term unicorn in the financial world refers to a privately-owned startup or company, with a valuation totalling over $1 billion. And contrary to its mythical moniker, a list of near 400 unicorn companies have been compiled by CB-Insights, with a total cumulative valuation of about $1,391 billion.
- Unicorn businesses are private companies and startups that have a valuation of over $1b
- Popular unicorn companies include Uber, Wish, SpaceX, and Airbnb
- These startups often experience rapid growth and attract venture capitalist investors
How do we get to $1B?
Valuations of unicorns are established by long term forecasting by investors and venture capitalists, based on an impression of how the company will grow, rather than based on financial performance. As such, valuations are often overvalued when unicorns launch an IPO. The public offering of We Co. (parent company of WeWork) earlier this year, experienced a $32billion cut to its valuation before withdrawing its IPO; Uber Technologies Inc. is also seeing declines in its shares. These overvaluations are often due to overinflated common share values and exaggerated by differences in private and public reporting practices.
However, despite the increased scepticism towards their valuations, the future for current and sprouting unicorn companies is looking bright, with continued projected investment growth.
The capital invested so far in 2019 Q3 is forecasted to match 2018’s colossal record.
Industry Trends in the Unicorn Business Club
The top three industries of global unicorn companies are far from surprising, given the increasingly mobile and technologically innovative marketplace : 12.5% (51 firms) of unicorns belong to the Fintech environment, closely followed by Internet software & services at 12.3% (50 firms), and eCommerce companies at 11.5% (47 firms).
Categories of International Unicorn companies by percentage. Data Source– CB-Insights
With the growth in open banking and movement towards API innovation in financial services, FinTech leads in unicorn business categories, and in receiving investment capital from Venture Capitalists and US banks. These investment decisions are often committed due to
(1) the potential in receiving high returns from FinTech business models, and
(2) to establish strategic partnerships to get ahead in the technologically-focused future of banking.
Top Fintech sectors by US bank investments. Source– CB-Insights
Even beyond the activity of unicorn businesses, there is a trend of American bank investors looking to invest in Payments and Settlement Fintechs to add value to their portfolios.
- Fintechs focused on payments & settlements often consist of businesses that outfit payment infrastructure to businesses, between consumers and businesses, or provide settlement solutions
The forthcoming response to FinTech business has proliferated much of the emergence of unicorns around the world.
Another emerging trend in venture capital investments is the recent, rapid rise in cybersecurity unicorns materializing in the market. Over 600 deals involving private cybersecurity firms were seen in 2018, totalling a 40% increase from the amount in 2015.
Top Fintech sectors by US bank investments. Source– CB-Insights
Investors and venture capitalists are seen betting more and more on cybersecurity startups more than ever, with 4 companies newly reaching the unicorn threshold so far in 2019, adding to the now 13 total cybersecurity unicorn firms around the world.
Bigger Ambitions, Bigger Capital
The increase in unicorn businesses emerging in the market is no peripheral incidence–startups are seeing a trend in longer funding periods and increased capital investments over the past few years. Monitor research presented by the Silicon Valley Bank reports the venture capital investment “timeline has also extended, meaning GPs [general partnerships] have needed more time to garner enough LP [limited partnership] commitments to meet targets.”
More and more startups nowadays are going after much larger and global opportunities than ever before, and naturally, with their increased ambition, a new paradigm of investment capital is in the making.
Closing timelines for Venture Capital funds are showing an increase in trend.
“With plenty of capital available in the private market, [startups] can afford to pick when they want to go public. With nine-figure raises in the private market becoming a daily occurrence, the dynamic that led companies to IPO as a way to access capital has changed.”
—Ryan Logue, Shareworks by Morgan Stanley
This behaviour of prolonged private ownership is seen especially in AI and machine-learning-based startups.
The trend of increased scaling of startup fundraising is also balancing out the volatility and scepticism of the startup market, paving the way for higher-quality unicorn companies.
“[Since 2015, we are] seeing more capital being invested, now up to $4b in loans last year domestically [in the US], but about 30% fewer companies. So the market is going after, what they would argue, is the best companies and more money is going after them. If you look at that dynamic and that amount of capital, right now today, the credit risk isn’t that high.”
—Greg Becker, President and CEO, SVB Financial Group; CEO, Silicon Valley Bank
Global Entrepreneurship on the Rise
Another exciting trend emerging in the venture capital investment landscape is the increase of global pursuits.vThe distribution of startup success on the international stage has widened greatly, with growth in unicorn countries from 9 to 26 countries in four years.
The United States still holds a lead in its share of unicorns (49%), with China at 24%, followed by the United Kingdom and India at around 5% of the international market.
Q2 2019 Geographic Distribution of Unicorns; the 37 unicorns within”other” category belong to more than 20 countries. Source– Toptal LLC
With opportunities emerging for startups in more global and frontier markets than ever historically, the widening geographical trend in venture capital and unicorn businesses is forecasted to continue to expand.
Innovation in the technological and finance field has powered a rise in startup success, and an increase in the private timeline of companies, both fed into the increased emergence of unicorn businesses throughout the past few years, allowing the startups to chase after larger-scaled opportunities and environments.
As entrepreneurs become more sophisticated and ambitious, a rise in global unicorn businesses and capital fundraising can be seen throughout the current venture capital investment landscape.