What is a unicorn?
A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. Decacorn is a word used for those companies over $10 billion, while hectocorn is used for such a company valued over $100 billion.
According to TechCrunch, there were 279 unicorns as of March 2018. The largest unicorns included Ant Financial, DiDi, Airbnb, Stripe and Palantir Technologies. Lyft is the most recent decacorn that turned into a public company on March 29, 2019.
Just like the name suggests, unicorns were originally so rare they were almost seen as mythical. However, Uber and other technology companies have paved the way for new emerging unicorns to exist, each one of which has the potential to influence financial and cultural norms in ways that seem innovative and new. Yet, from a legal perspective, these unicorn companies are regulated just like their smaller counterparts. Unicorns' valuation has not been matched with any expansion or recalibration of regulation. As a result, vital Information about these companies remains secret perhaps for years until an IPO moves a unicorn into the public sector.
What makes unicorns so hard to regulate?
According to academics in 2007, investors and venture capital firms are adopting the get big fast (GBF) strategy for startups. GBF is a strategy where a startup tries to expand at a high rate through large funding rounds and price cutting to gain an advantage on market share and push away rival competitors as fast as possible. The rapid exponential returns through this strategy seem to be attractive to all parties involved.
Many unicorns were created through buyouts from large public companies. In a low-interest rate and slow-growth environment, many companies like Apple, Facebook, and Google focus on acquisitions instead of focusing on capital expenditures and the development of internal investment projects. Some large companies would rather grow their businesses by buying out technology and business models rather than creating it themselves. This is especially true when companies cannot afford to spend the time or squeeze out the proper funds necessary to pursue such ambitious endeavors.
Increase of private capital available
The average age of a technology company before it goes public is roughly 11 years. This comes from the increased amount of private capital available to unicorns and the passing of The US Jumpstart our Business Startups (JOBS) Act in 2012, which increased the number of shareholders a company can have by a multiple of four before the company had to disclose its financials publicly. The amount of private capital invested in software companies has increased three times what was presently available from 2013 to 2015.
Through many funding rounds, companies do not need to go through an initial public offering IPO to obtain capital or higher valuation. Instead, they can just go back to their investors for more capital. IPOs also run the risk of devaluation of a company if the public market thinks a company is worth less than its investors. A recent example of this situation was with the company Square, best known for its mobile payments and financial services business. Other examples include Trivago, a popular German hotel search engine, both of which were priced below their initial offer prices by the market. This was because of the severe over-valuation of both companies in the private market by investors and venture capital firms. The market did not agree with both companies' valuations, and therefore, dropped the price of each stock from their initial IPO range.
Investors and startups also do not want to deal with the hassle of going public because of increased regulations. Regulations like the Sarbanes-Oxley Act have implemented more stringent regulations following several bankruptcy cases in the US market that many of these companies want to avoid.
Startups are taking advantage of the flood of new technology of the last decade to obtain Unicorn status. With the explosion of social media and access to millions utilizing this technology to gain massive economies of scale, startups could expand their business faster than ever. New innovations in technology including mobile smartphones, P2P platforms, and cloud computing with the combination of social media applications has aided in the growth of unicorns.