With the first generation unicorns such as Uber currently valued at $75 billion (down from nearly $120 billion pre-IPO), investors seem to all want to know what the next wave of unicorns will bring. A new breed of startup unicorns is pushing their way to the top, as the era of the disruptive technology unicorn seems to be coming to a halt. While startup investments have been around for decades, for the discerning investor who wants to play with the high rollers such as Airbnb, Benchling, and Blend, only a unicorn will do.
Look For The One Percentile
Not every startup is going to be the next unicorn, and for investors, it might be a tough feat to discover exactly who will make it past the line. According to research, only one percent of businesses make it to the unicorn mark. In order to qualify as a unicorn, startups need to reach a $1 billion valuation. For an investor, seed money into a startup that has the potential to make it to this one percent club has high returns written all over it. Identifying what makes a company unique enough to catapult it to these heights might mean a few misses for investors before hitting the one that has optimal potential. For an investor, seed funds of several $100k will be more likely to result in an exponential return.
Don’t Beat The Competition, Join Them
The competition for the ultimate unicorn investment is strong, and according to research, the three biggest investors in unicorns were all major corporations. Smaller investors may have to compete against businesses such as Tencent Holdings, Sequoia Capital, and IDG to find their very own unicorn. While some of these businesses are considered among the largest in the world, they are not averse to joint ventures and other investors joining the panel. From an investor’s perspective, although this may seem like a smaller piece of the pie, it also enables other investors to take on some of the risk. Investors who are new to investing in startups, especially those who have the potential to become the next unicorn, may want to partner up with a business who already has a substantial investment portfolio.
Although there is always risk in an investment, pooling funds together with an established business does provide some form of reassurance. Often referred to as Unicorn Hunters, there are companies that actively pursue the acquisition of or investment in unicorns. While they form a substantial part of the investment, unicorns often require more than one investor and this opens up the door to new investors. By going with unicorns that already have the backing of known players in the market, it creates a sense of security when making that investment. Sites such as CB Insights provide a wealth of information on VCs known for backing unicorns, which will make the decision-making process a little easier. Be advised, however, that joining the Unicorn Hunters isn’t for modest investors. Typical VCs require minimum investments of at least $1 million to $5 million, but the threshold can be even higher.
An Increasing Trend
Just because disruptive technology might no longer be the hot and happening trendsetter it used to, doesn’t mean that unicorns are a lost cause for investors. In fact, the contrary is true as results reveal that the number of unicorns increased by 67 percent from 2017 to 2018. While internet software services still seem to dominate the sphere, other areas investors should explore include e-commerce, healthcare and fintech. There is also a sector called “other” that includes businesses that are hard to classify, but tend to fill a niche position that, until that point in time, it was a service we didn’t know we needed until it was there.
For an investor looking to add a unicorn to their portfolio and who can handle the sizeable entry fee to the world of VC investing, risk is among the most important elements to consider before taking the plunge. By pairing up with others who are willing to share the risk, the investment becomes a little more reassuring and the risk a little more reasonable.
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