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Unicorns: How do you become a billion-dollar start-up?

Once a myth, early-stage tech businesses are reaching $1bn valuations through major funding. Startups analyses the growth in billion-dollar price tags

Achieving the near-mythical ‘unicorn’ status has become the aspiration for tech start-ups the world over.

But just what are unicorns and what does your start-up need to do to join the so-called ‘unicorn club’?

From defining a unicorn, to the rise of British unicorns, and the winning formula required, our comprehensive lowdown has all you need to know about the phrase you'll hear uttered at pretty much every tech start-up event these days.

Read on to find out more…

What are unicorns?

In the venture capital (VC) world, a unicorn is a term for a technology start-up which has achieved a valuation of $1bn or higher on the back of fundraising. First coined by VC and seed investor Aileen Lee of Cowboy Ventures in her 2013 article Welcome To The Unicorn Club, the phrase is now widely used by journalists, funds, and start-up businesses.

For fans of the brilliant US tech start-up sitcom Silicon Valley, the ‘three commas club' is used to much the same effect (albeit post-exit) by the superbly observed obnoxious billionaire tech entrepreneur-turned-investor Russ Hanneman. Allegedly a combination of prominent US tech entrepreneurs, Hanneman's wealth is not-too-subtly communicated to all with the launch of his own tequila brand ‘Tres Commas'.

And when Hanneman's wealth drops to ‘just' $986m he talks of being “financially ruined”, having to “spell billion with an M”, and needing to “re-billionize” because he owns a supercar with doors that open like everyone else's.

But before all this hyperbole, $1bn valuation start-ups were named unicorns as it was incredibly rare for a privately-owned tech start-up to be worth that much. Yet globally, there are now over 130 privately-owned billion-dollar start-ups. In 2013, there were only 25 such companies.

In America, the unicorn club is becoming less exclusive by the week with the likes of Uber (valued at $41.2bn), Airbnb ($20bn), Snapchat ($15bn) and Dropbox ($10.4bn) leading the way. The valuations of these companies has even seen the creation of a new phrase – ‘decacorns’ – to describe those tech start-ups valued at $10bn or more.

But, while the US has gained a reputation as a nucleus for $1bn unicorn start-ups, the UK is steadily becoming a hub for $1bn tech businesses…

The UK: the new land of unicorns?

There are now 17 start-ups in the UK which have surpassed the $1bn valuation mark including peer-to-peer lender Funding Circle, takeaway service Just Eat, fashion marketplace ASOS and property platform Zoopla.

Earlier this year, VC firm GP Bullhound published a report entitled European Unicorn’s: Do they have legs? which revealed that the UK has the largest number of unicorn companies in Europe (17 out of 40). Managing partner Manish Madhvani said the UK had “raced ahead as the undisputed home of unicorns in Europe, with London producing the vast majority of Britain’s billion-dollar tech companies”.

The firm also made a number of projections as to the British tech start-ups it thinks will become the next $1bn unicorns – referred to as ‘unicorn foals’ – which included food subscription service Hello Fresh, collaboration software company Huddle, and foreign exchange business WorldRemit.

This process of identifying and discovering unicorn foals has now become a key strategy for many investors and VCs in the UK. In June of this year, former MMC Ventures partner Rory Stirling, LOVEFiLM co-founder Simon Calver and former Balderton Capital partner Harry Briggs announced they would be leading a £200m start-up fund to “find Britain’s next unicorn businesses”.

While Britain’s unicorn club is growing apace – there were three new unicorn businesses in the last year – it does still have some way to go to match the US which witnessed 22 new unicorns in the same time period.

Unicorns: Why now?

According to, “Unicorns now seem to be everywhere, backed by a bull market and a generation of disruptive technologies”.

With more and more investors looking to diversify their portfolios, funding rounds have increased exponentially and this in turn has created billion-dollar valuations.

This year alone there have been a number of astoundingly high funding rounds. In January 2015, currency exchange start-up TransferWise secured a staggering $58m in a Series C round and Shazam raised $30m from DN Capital.

GP Bullhound’s Madvhani has explained that “growth is accelerating because we have created an environment capable of sustaining high levels of investment across a range of tech sectors”.

In the UK, Madvhani argues that London’s thriving start-up economy, particularly in finance technology (fintech), has bolstered billion-dollar valuations thanks to the capital’s “unique position in global finance driving growth”.

GP Bullhound’s report also pointed to a number of other reasons as to why Europe is becoming a breeding ground for unicorns:

  • More public market investors are entering into pre-IPO rounds.
  • The number of funding rounds over $30m are increasing – in Europe transactions increased from 30 in April 2014 to 46 in the year up to April 2015.
  • It’s the first time European companies have capital to “rival US peers”.

While it’s fairly uncomplicated to see why unicorn numbers are growing, there has been a lot of debate as to whether the proliferation of unicorns is a sign that we are in fact in a tech bubble, which could quickly burst.

$1bn unicorn valuations: Arbitrary or justified?

Valuations are often based on the latest round of funding and generally refer to what someone is willing to pay at a certain time for something, so there is an argument from many in the space that the explosion of unicorns is arbitrary.

Unicorn at work

In June, Business Insider UK reported; “We’re in a tech bubble and it’s going to end badly for many companies”. It referred to a meeting with a London unicorn start-up which noted concerns that “it would all come to an end sooner than later” referencing the fact that some private valued tech start-ups are now valued higher than those on the public markets, and that valuations of start-ups such as Uber are now bigger than those of established firms such as Kraft Foods and Salesforce.

Other concerns listed included issues around burn rates; several unicorn start-ups are yet to create concrete revenue models or turn a profit, and “too many business models being dependent on one thing not happening” such as losing staff to a competitor or not being able to raise a funding round.

Victor Basta, managing partner of merger and acquisition advisory firm Magister Advisors, echoed these concerns:

“Microsoft’s market value at IPO was $500m. Cisco’s was $300m. Today an eye-watering 100+ private companies are valued at more than $1bn. To warrant this, each must have enduring long-term value, derived from either being a global ‘platform’ company, or, at the very least, a very high value product business. In our view there are some significant deviations from this essential rule. We’ve traded a market bubble for specific company bubbles, inflated by the ready availability of venture capital chasing the next big thing.”

Basta’s argument is supported by evidence of businesses that have already been part of, and since exited, the unicorn club. GP Bullhound reports that in the last year,, Monitise and eDreams ODIGEO have all lost their unicorn status – indicating that the market may be as inflated as some suggest.

However, there is an equally valid counter argument which says billion-dollar unicorn valuations are justified and that we aren’t in a bubble.

With the economy shifting to apps and tech innovations, disruptive businesses in the tech industry are in high demand and will continue to be in line with the economic cycle. Coupled with evidence that many unicorn start-ups are generating real revenues (Uber for instance) and have IPO’d, or will IPO, with solid revenues, these billion-dollar valuations could be warranted.

An article in the Wall Street Journal which included interviews with US unicorns Instacart, JustFab and Prosper Marketplace claimed that unicorn status was justified and argued that “even though valuations are inflated overall, many start-ups will continue to increase in value”.

Earlier this year, high-profile VC firm Andreessen Horowitz confirmed this opinion. In a conference held in Silicon Valley, the firm publicly stated that the tech market is not in a bubble and said that the amount of venture capital going to unicorns was nothing compared to the dotcom bubble of 1999 where tech investment volumes were much larger, despite the smaller number of internet users.

How to join the unicorn club

Do you want to join the unicorn club? According to GP Bullhound, the following seven steps make up a winning formula to help achieve a billion-dollar valuation:

1. Focus on consumers

The majority (77%) of new unicorns ($1bn valuations in the last year) were found to be consumer focused rather than B2B.

2. Specialise in fintech, e-commerce or software

These are the sectors that represent the majority of unicorns, each representing 20% of the total number of European unicorns – fintech share is growing the fastest.

3. Don’t expect unicorn status overnight

The average age of European unicorns is nine years-old, although many start-ups have hit the $1bn mark quicker such as Funding Circle (launched in 2009) and TransferWise (launched in 2011).

4. Start in your 30s

Over 57% of European unicorns were founded by entrepreneurs aged 30 to 40 years-old. Less than 23% were founded by those under 30 while just 19% were founded by those over 40.

5. Retain your founding team

87% of unicorn companies are still managed by at least one member of their original founding team – 52% still have their original founders on board.

6. Aim to raise over $100m investment

You’ll need serious funding to reach a $1bn valuation. 23% of European unicorns have raised between $100m and $150m while 20% have raised less than $50m. You’ll need more funding if your business is consumer-focused compared to enterprise-focused ($246m v $178m).

7. Look for groups of investors

The majority (37%) of European unicorns have received investment from five to eight investors so you should seek out syndicates. There are exceptions to this statistic though – unicorn start-up King (the creator of Candy Crush) has only raised funding from two investors.


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