Investing in unicorn companies: What it means and how it works

Identifying so-called unicorn companies early can be highly rewarding for early investors, but what exactly does it mean to be a unicorn and how do investors profit from these companies? Here’s what you need to know about investing in unicorn companies.

What is a unicorn company?

A unicorn company is a private business that achieves a valuation of $1 billion or more. As their name suggests, unicorn companies are rare and often include companies in nascent industries that are seen as disruptive.

Unicorn companies can come from any industry, but have largely been concentrated in the tech sector in recent years. It’s not easy for a private company to grow to a $1 billion valuation, but the ones that do often share some common characteristics:

• Large market opportunity: It’s hard to become a large company unless you’re in a large market. Companies like Alphabet and Meta Platforms have benefited from shifts within the global advertising market.
• Innovation and disruptive: Unicorns may offer some product or service that changes the way an industry operated previously. Think of how Uber and Lyft changed transportation or the taxi industry.
• Strong leadership: A company can have a great idea, but it needs great leadership from its management team and CEO to actually get results. Amazon’s Jeff Bezos was instrumental in driving the company’s success in retail and cloud computing.
• Fast growth: Companies that achieve unicorn status are typically experiencing very high growth in terms of sales. Unicorns may lose money in their early years, but sales growth is typically high.

How investing in unicorn companies works

When companies are getting started, the founders often raise money initially from friends and family to help them get off the ground. After that, angel investors and venture capital firms step in to provide additional funding in return for a stake in the company. For example, in a unicorn company investment, a venture capital firm may take a 10 percent stake for a $100 million investment, which implies a total valuation of $1 billion.

For individual investors looking to invest in unicorn companies, the unfortunate reality is that these sorts of investments will be off limits until the companies go public through an initial public offering, or IPO. But that doesn’t necessarily mean you’ve missed out on a great investment. Many companies that came public as unicorns have rewarded shareholders handsomely in recent years.

Examples of unicorn companies

There are many companies that were once unicorns that are now household names. There were over 1,200 unicorns in the world as of October 2023, according to CB Insights. Here are some of the largest unicorns today:

Bottom line

Unicorn companies are private companies worth $1 billion or more based on their most recent valuation. Companies that achieve unicorn status are often fast growing, disruptive companies with large market opportunities. Investing in private companies is typically reserved for institutional investors, so individual investors looking to get a piece of the action will have to wait until these companies go public.