A unicorn is a a privately held start-up with a valuation of at least one billion US dollars.
The term originates from the fact that start-ups with such a valuation were long considered to be particularly rare. Today, the term is primarily used to describe fast-growing private companies with an exceptionally high valuation.
The classification as a ‘unicorn’ is usually based on the valuation agreed between the start-up and its investors during a funding round. It does not automatically mean that the company generates US$1 billion in turnover, is profitable or has correspondingly high cash reserves.
Typical characteristics of a unicorn start-up are:
- strong growth in turnover or user numbers
- a large addressable market potential
- a scalable business model
- substantial investment from venture capital investors
- opportunities for international expansion
- a strong market position or technological differentiation
- high expectations regarding the company’s future performance
A simplified example:
| Key figure | Value |
| Pre-money valuation | 900 million US dollars |
| New investment | 150 million US dollars |
| Post-money valuation | US$1.05 billion |
Following this funding round, the post-money valuation stands at over one billion US dollars. The company is therefore considered a unicorn.
As well as ‘unicorn’, there are other terms used to describe start-ups with particularly high valuations:
| Term | Business valuation |
| Unicorn | at least 1 billion US dollars |
| Decacorn | at least 10 billion US dollars |
| Hectocorn | at least 100 billion US dollars |
A ‘unicorn’ valuation can offer a start-up a number of advantages:
- greater attention from the media and the public
- easier access to further investors
- greater appeal to potential employees
- a stronger negotiating position vis-à-vis partners
- additional financial resources for growth and expansion
At the same time, high valuations can also present challenges:
- significant pressure on growth and returns
- investors’ high expectations
- valuation targets that are more difficult to achieve in later funding rounds
- Risk of a down round
- greater dilution if further capital is required
- A focus on growth at the expense of profitability or sustainable development
A common mistake is to equate a high valuation with actual financial success. A company’s valuation is based on expectations for the future and can change significantly. Key factors include turnover, customer loyalty, profitability, liquidity and a business model that is sustainable in the long term.
For most start-ups, therefore, achieving ‘unicorn’ status should not be the primary goal. It is more important to solve a relevant problem, attract customers and build a financially sustainable business.
innoWerft supports start-up founders in developing scalable business models, realistically assessing market potential and funding strategies, and preparing for discussions with investors and business partners.