What "unicorn" means
A unicorn is a startup that is still privately held (not listed on a stock exchange) and has a valuation of $1 billion or more. The valuation usually comes from the company's most recent funding round.
Once a unicorn goes public or is bought by another company, it is no longer counted as a unicorn, even if it is worth far more.
Where the term came from
Venture investor Aileen Lee, founder of Cowboy Ventures, coined the term in a 2013 article. At the time, U.S. software startups reaching a billion-dollar valuation were rare enough to seem mythical, like the creature. The name stuck, and as venture funding grew over the following decade, unicorns became far more common, numbering in the hundreds worldwide, and later more than a thousand.
Unicorns, decacorns and hectocorns
| Term | Private valuation |
|---|---|
| Unicorn | $1 billion or more |
| Decacorn | $10 billion or more |
| Hectocorn (sometimes "super-unicorn") | $100 billion or more |
| Soonicorn / minicorn | Informal terms for startups expected to reach $1 billion soon |
Unicorns are tracked by research firms such as CB Insights, PitchBook and Crunchbase, and lists differ slightly because each uses its own data and rules. Well-known companies that were unicorns while private include Airbnb, Uber and Stripe, and the biggest private technology companies of recent years have reached hectocorn status.
How a startup becomes a unicorn
A company becomes a unicorn the moment investors agree to a funding round at a valuation of $1 billion or more. For example, if investors put in $100 million in exchange for 10% of the company, that implies a post-money valuation of $1 billion.
To get there, startups usually need some mix of very fast revenue growth, a huge potential market, strong investor demand for their sector and several rounds of venture funding. Many unicorns are in software, fintech, artificial intelligence, e-commerce and marketplaces.
Why a unicorn valuation is not the same as a market price
A unicorn's valuation is a negotiated price, set in a private deal between the company and a handful of investors. Several things can make it look higher than what the company would fetch in a sale or on the stock market:
- Preferred vs. common shares: new investors buy preferred shares with extra protections, such as getting paid first in a sale (liquidation preferences). The headline valuation applies that preferred-share price to every share, including common shares that have no such protection.
- Small slices: selling 5% of a company at a given price does not mean anyone would pay the same price for 100%.
- Investor competition: in hot markets, funds bid against each other, pushing prices up.
- Stale numbers: a valuation from a round two years ago may not reflect today's market.
Public markets reprice companies every second; private valuations change only when a new round happens, which is why some unicorns list on the stock market at a lower value than their last private round.
Why unicorns matter
- For the economy: they can create new industries, many jobs and new competition for incumbents.
- For investors: one unicorn can return an entire venture capital fund.
- For a country's startup scene: the number of unicorns is often used as a scoreboard. The U.S. has by far the most, followed by China, with India, the U.K., Germany and others well behind.
- For employees: stock options in a unicorn can become valuable, but only if the company eventually exits at a good price.
When unicorns stumble
Being valued at $1 billion does not mean a company is profitable, or even close. When funding dries up, often because interest rates rise or IPO markets close, some unicorns struggle:
- Down rounds: raising new money at a lower valuation than before.
- Zombie unicorns: companies that have not raised in years, are not growing fast enough to raise again, and are not profitable enough to stand alone.
- Fallen unicorns: companies that lose their billion-dollar status, sell for less than they raised, or shut down.
- Fraud and scandal: a few high-profile unicorns have collapsed after investors discovered the business was not what it claimed.
How to read a "new unicorn" headline
When you read "Startup X becomes a unicorn after raising $150 million", ask: how much revenue does it have and how fast is it growing? Is it profitable or burning cash? Who led the round, and on what terms? The valuation tells you what a few investors were willing to pay for a slice. The business results tell you whether the price makes sense.
