How are the Unicorns doing?

Summary

• Crunchbase’s unicorn list has added 44 new entities within a year which were valued cumulatively at US$64 billion and have raised US$12 billion cumulative funding with an average deal of US$300 million.
• Unicorn companies are the most desired targets for investment for investors such as Softbank which intends to fund 70 unicorn companies through its US$100 billion vision fund.
• In 2020, there have been 12 exits through IPOs, the most preferred method of exit for a Unicorn.

Unicorn is a term coined by venture capitalist Aileen Lee to identify rare successful ventures, and the world has been experiencing an increased number of companies claiming to be a unicorn. To be a unicorn company, an entity must be a privately held start-up with a valuation of over US$1 billion.

Crunchbase’s unicorn list added 44 new companies within a year, reflecting a market riding high irrespective of the COVID-19 pandemic. These 44 new companies have been valued cumulatively at US$64 billion and have raised US$12 billion cumulative funding with an average deal of US$300 million.

Sectors such as education sector and software have witnessed many companies joining the unicorn list. Companies such as Quizlet, Udemy, ApplyBoard, and Course Hero are leading the education services providers while under software services, we have Notion, Figma and Podium. It has been observed that in 2020 fintech and branded e-commerce recorded fewer unicorn companies as compared to software services and online education.

Total unicorn basket stands are valued just under US$2 trillion with more than 601 companies collectively raising US$442 billion. The average funding deal is around US$735 million, with an average valuation of US$3.3 billion. Within a year, the basket valuation grew to US$2 trillion from US$1.6 trillion, which had represented 452 companies.

EV tech company Arrival based out of UK, US-based company Pony.ai engaged in autonomous driving solutions, and Indian biotech company, Biocon Biologics are 2020’s new unicorns that are the most highly valued players (at over US$3 billion each).

Most of the unicorns are from the US (27), followed by China (4), the UK (3), Israel (2) and India (2).

Role of Softbank in supporting Unicorns

Softbank is known for its investments in Unicorn companies. CEO Masayoshi Son’s strategy is to hold a significant share once the companies go public. For example, Mr Son invested US$20 million to acquire a stake of 34.4% of the company in Alibaba before the IPO and currently owns almost 30.07% of Alibaba. Alibaba is presently valued at US$500 billion, and Softbank’s holding is worth US$150 billion. Through its US$100 billion vision fund, Softbank has invested in many unicorn companies that have the potential to become US$500 billion. The funds are focused on technology companies based out of Silicon Valley, Shenzhen, Shanghai, Boston, and Tokyo.

Softbank and Masayoshi are using the US$100 billion vision fund to invest in about 70 Unicorn companies.

In general, it takes over 20 years for money to grow by four times and two times in ten years.

However, many investments of Softbank have backfired also. Softbank has lost millions and billions of money by investing in companies such as WeWork and Uber. Its recent loss is its investment in German fintech Wirecard AG.

German fintech darling, Wirecard AG recently admitted to a €1.9 billion fraud in its financials when it failed to provide adequate audit evidence regarding the €1.9 billion amount mentioned on the balance sheet. Share prices went down almost 46%% post the acceptance of the fraud. Plummeting share prices have washed away significant profits from the investors. Big investors such as Softbank lost majorly as it had invested US$1 billion investment in 2019 via convertible bond to be repaid in stock. The profits have taken a massive hit. This is because since the fraud was brought to light the shares have been trading at ~80% below the announcement day level.

Exit values

An IPO is the most desired exit for a unicorn company as the valuation of the company generally increases post IPO. For example, Zoom (founded in 2011), which provides a communication platform, recorded a valuation of US$ 1 billion in 2017 after its series D round and raised US$751 million at its IPO with a valuation of US$9.2 billion. Amazon.com, Inc. (NASDAQ:AMZN), which was started at Jeff Bezos’ garage in 1994, has become a household name globally as an online go-to-shopping site. The company started trading in 1997 and within 23 years, has reached a market cap of US$1.52 trillion as on 6 July 2020. The company currently is one of the biggest technology companies focused on e-commerce, cloud services, digital services such as streaming and artificial intelligence.

The companies which exited in 2018 from the Crunchbase cohort, had a collective valuation of US$235 billion. Post IPO, the aggregate valuation went up to US$364 billion, demonstrating a 55% increase, or US$129 billion above the last private valuation.

Some 2019 IPOs such as Zoom, Fastly, Cloudflare, Dynatrace and many more are experiencing increased demand for their services, thus business performances amid pandemic with demand. Unicorns such as insurance company Lemonade and cloud data company Snowflake have filed to go public. Unicorn Company Palantir, a Big Tech Data Analytics company founded in 2003, is eyeing an IPO in 2020. The company is still deciding on choosing a traditional IPO or a direct public offering.

In 2020, there have been 12 exits so far, which had demonstrated 91% growth in value. The companies reached US$50 billion from US$26 billion post IPO.

With the pandemic driving the growth of technology companies, the new unicorn companies, primarily in the software service and online learning space, are expected to continue performing well and take the IPO route.