What Is a Unicorn?

A unicorn is a term used in the venture capital industry to describe a startup company with a value of over $1 billion. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed stage venture capital fund based in Palo Alto, California.

Unicorns can also refer to a recruitment phenomenon within the human resources (HR) sector. HR managers may have high expectations to fill a position, leading them to look for candidates with qualifications that are higher than required for a specific job. In essence, these managers are looking for a unicorn, which leads to a disconnect between their ideal candidate versus who they can hire from the pool of people available.

Understanding Unicorns

A unicorn is what most people in the financial world call a startup that is privately-owned with a valuation exceeding $1 billion. Some of the more popular unicorns based in the U.S. include home-sharing giant Airbnb, video game company Epic Games, as well as fintech companies Robinhood and Sofi.

Aileen Lee first wrote about unicorns in the venture capital world in her article, "Welcome to the Unicorn Club: Learning from Billion-Dollar Startups." Here, she looked at software startups founded in the 2000s and estimated that only 0.07% of them ever reach $1 billion valuation. Startups that managed to reach the $1 billion mark, she noted, are so rare that finding one is as difficult as finding a mythical unicorn.

According to Lee, the first unicorns were founded in the 1990s. Alphabet (GOOG)—then Google—she noted, was the clear super-unicorn of the group with a valuation of more than $100 billion. Many unicorns were born in the 2000s, though Facebook (FB) is the decade's only super-unicorn.

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Investing In the Tech Industry

Unicorns and Venture Investing

Since the publication of Lee's article, the term has become widely used to refer to startups in the technology, mobile technology, and information technology sectors—usually at the intersection of all three—with very high valuations questionably supported by their fundamental finances.

Benchmark Capital partner and investment guru Bill Gurley wrote about the difference between late-stage private capital fundraising and an IPO in a blog post, saying that "an unprecedented 80 private companies have raised financings at valuations over $1B" since the 2010s, and that "late-stage investors, desperately afraid of missing out on acquiring shareholding positions in possible 'unicorn' companies, have essentially abandoned their traditional risk analysis."

The question of whether the technology sector's unicorns constitute a reinflation of the dotcom bubble of the late 1990s continues to stir debate. Some argue that the increase in the number of new companies valued above $1 billion is a clear sign of froth in markets. Others argue that the large number of companies with high valuations is a reflection of a new wave of technologically-driven productivity, similar to the invention of the printing press nearly 600 years ago. Still others argue that globalization and the monetary policy of central banks since the Great Recession have created great waves of capital that slosh around the globe on a hunt for unicorns.

Key Takeaways

  • Unicorn is the term used in the venture capital industry to describe a startup company with a value of over $1 billion. 
  • The term was first coined by venture capitalist Aileen Lee.
  • Some popular unicorns include Airbnb, Uber, SpaceX, Robinhood, and SoFi.
  • The term unicorn can also be used by human resources managers to describe their ideal candidates, who may be overqualified for a certain position.

Valuations of Unicorns

The value of unicorns is generally based on how investors and venture capitalists feel they will grow and develop, so it all comes down to longer-term forecasting. This means their valuations have nothing to do with the way they perform financially. In fact, many of these companies rarely generate any profits when they first get running.

Investors and capitalists may come across some hurdles, though. If there are no other competitors in the industry—making the startup a first of its kind—there may be no other business model with which to compare, making it a somewhat complicated process.

While unicorns are startups with valuations of over $1 billion, companies with valuations of over $10 billion are sometimes referred to as decacorns.

Current Unicorns

Far from being merely mythological creatures, unicorns are a regular feature in popular business and finance discussions. Some familiar U.S.-based unicorns include Uber, Airbnb, SpaceX, Palantir Technologies, WeWork, and Pinterest. China claims a number of unicorns as well, including Didi Chuxing, Xiaomi, China Internet Plus Holding (Meituan Dianping), and Lu.com.

Fortune magazine, for example, has created a list with more than 100 entries of current unicorns. CB Insights, on the other hand, tallied 360 unicorns with a cumulative value of $1.124 trillion as of June 2019.

Unicorns in the Business World

When a company strives for the best employees for the job, its expectations may be far too lofty when compared to what's available in the labor pool. Hiring managers may look for or hold out for candidates with much higher qualifications than what's required for the job.

For example, a medium-sized firm may want to recruit someone who has marketing, social media, writing, sales, and management experience, and speaks three different languages. While it may be cost-effective to hire one person with all those skills instead of multiple employees to handle separate tasks, it may be too much for the new hire to handle and can lead to disappointment.