Unicorn Business ModelIn the venture capital industry, the term unicorn refers to any start-up that reaches the valuation of $1 billion; Uber, Airbnb, Snapchat and Pinterest are some well-known unicorns. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed stage venture capital fund based in Palo Alto, California. Aileen Lee is a U.S based seed venture capital investor. The firm seeks to invest in US-based seed-stage companies operating in the software, hardware, media, and consumer service sectors.
The phenomenon of unicorns is quite controversial. Although some professionals believe that such companies are just a result of technological progress and innovation, others believe that the increasing number of unicorns is a sign of a bubble in the industry. A bubble is an economic cycle that is characterized by the rapid escalation of market value.
Valuation of unicorn is complex: Each unicorn today has its own story with a list of its strengths and weaknesses. Valuing unicorns is a sophisticated process that involves the consideration of various factors and the development of long-term forecasts. Additional complications often arise due to the business models of such companies. Some companies become the first business of their kind in an industry, which makes the valuation process even more complicated.
Creative destruction: Mostly, all the unicorns have brought a disruption in the field they belong to. Uber, for example, changed the way people commuted. Airbnb changed the way people planned their stay in domestic/foreign destinations economically while travelling and Snapchat allows users to take photos and videos, exchange them with family and friends, and chat which disrupted the usage of the social media network to a great extent.
Creative destruction is a process through which something new brings about the termination of something existing before it. Creative destruction is required for progress of society. The term is used in almost all walks of life such as medical science, economics, and Information technology and almost everything. The term was coined by Joseph Schumpeter who was an Austrian Political Economist.
Unicorns are mostly the starters in their industry. They change the way people do things and gradually create a habit formation for their product or service. They keep innovation up and running to stay ahead of competitors which later booms.
In the Covid 19 pandemic, Indian start-ups such as Unacademy, Pine Labs, FirstCry, Zenoti, Nykaa, Postman, Zerodha, Razorpay, Cars24, Dailyhunt and Glance became unicorns just in years’ time. As experts have pointed out, the core propositions of these start-ups were ones that actually solved challenges for individuals and businesses during the lockdown for a large portion of the year. For example, during pandemic online learning continued to be on the rise and the boom in valuation for Unacademy, it had already set a good pace in 2019 and had caught the Venture Capital firm’s eye. While students looked at catching up on test prep work, those working from home prepped their confidence. It also boosted business of other educational technology products.
Fintech apps such as Razorpay and Pine Labs boomed as online transactions for ecommerce and hyper local services grew and contactless digital payments and even retailers jumped on to contactless payments. The digital payments saw a boom by the rapidly climbing UPI numbers since the lockdown in April last year. In November 2020, the UPI transactions grew to 2.2 Bn after crossing the 2 Bn mark the month before. WhatsApp Pay processed 0.81 Mn UPI transactions worth INR 29.72 Cr doubling the figures. In December, PhonePe processed transactions worth INR 1.82 Lakh Cr, to lead the market with a 40% share. PhonePe overtook Google Pay after the latter had taken the lead in November 2020 as the most-used UPI app.
The business models of unicorns are based on information technology. Uber got their model accepted by crafting a friendly app. Airbnb made the world seem smaller by making the best of the world wide web. A recent report declares that 87% of the unicorns products are software, 7% are hardware and the rest 6% are other products and services.
Unicorns adopt B2C model: 65% of the unicorns operate on B2C business model. Their goal is to simplify and make things easy for consumers and to be a part of their day to day life. Keeping things affordable is another key highlight of these start-ups. Spotify, is a Swedish audio streaming and media services provider which made the music lovers all over world most cheerful because listening to music is made easier.
Most of the unicorns are privately owned: The owners of the unicorn have conviction in their idea and running the business. Most of the unicorns are privately owned which gets their valuation bigger when an established company invests in it. India’s largest brokerage Zerodha turned a decade old in June 2020, it formally claimed unicorn status, ‘conservatively’ valuing itself at $1 billion as it announced an (ESOP) employee stock options buyback plan.
Widespread: CB Insights is a private company with a business analytics platform and global database that provides market intelligence on private companies and investor activities. According to this company as of November 2020, there are 504 unicorns globally with a cumulative valuation of $1,592 billion. The US leads with 242 unicorns; China is second at 119; India and the UK are third and fourth with 25 and 24 unicorns, respectively.
For the start-ups based out of Canada, there is an exclusive term for what we call a unicorn. It is ‘narwhal’. This means that any Canadian start-up company with a valuation of over $1 billion is called a narwhal.
