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Tech Start Ups & Unicorns

30 September 2015 |


"Unicorn" is a term coined to denote a start-up company which is valued at more than 1 billion dollars. Unicorns are predominantly found in the technology industry, and examples include companies such as Uber, AirBnB, Snapchat, Pinterest, Dropbox and Spotify. This is a short outline of some of the current discussions surrounding unicorns.

Putting it in context

Understanding "trends" in the market and having an idea of what type of companies are currently hyped and/or controversial would significantly boost a candidate"s commercial awareness. It illustrates an interest in the commercial world and takes your knowledge beyond understanding more conventional businesses such as Tesco or British Gas.

Start-up valuation

Valuation means working out how much a company is worth. Valuations of start-ups are attempting to make educated guesses and assumptions about the future, which is why it is such a difficult task.

A tech start-up typically makes no profit when looking for initial investment, but can yet be valued (as illustrated by the unicorns) at in excess of a billion dollars. How can this be? When looking for initial start-up capital, a typical scenario would be the business owner offering investors 10% of the company in return for 100 000 dollars. This means, on the face of it, that the company"s valuation is 1 million dollars (this is because if 10% is equivalent to 100 000 dollars, 100%, i.e. the full value of the company, will thus necessarily be 1 million dollars). It is important however to note that the company could probably not be sold for that amount at this point in time, as that figure is based on the future growth potential as opposed to the actual present value. An investor, when analysing whether such future growth is likely, will consider factors such as traction (how many people are using the service), reputation (of the entrepreneur), potential for distribution channel (if you have run an Instagram account with dog photos that has 10 million followers, that Instagram account might become a distribution channel for a dog food product) and the "hotness" of the industry.

Market bubbles

The high valuations of tech companies and arguably arbitrary and uncertain valuation models have led to some commentators warning that the current trend of tech start-ups and unicorns might be a "bubble". The term bubble is used to describe when the trade of a particular asset strongly deviates from the asset"s actual value. The bubble bursts when the price of the asset suddenly drops to adjust itself down from the inflated value created by, for instance, uncertain and overly optimistic valuation models, to its actual value. This is what happened during the end of the 1990s with the dotcom bubble* and in 2007 with the housing bubble**. To use the example above, imagine an investor having bought 10% of a start up for 100 000 dollars, in belief that in the future the company will be worth at least 1 million. When the bubble bursts, it may appear the company is only worth 10 000 dollars. This means the investor now only has a share of the company worth 1000 dollars, which he paid 100 000 dollars for.

Regulation as a threat

Many commentators have highlighted regulation as a potential threat for the novel and innovative services that tech start-ups typically offer. Regulations have been creating issues for companies such as AirBnB (where a potential increase in local laws regarding lodging and housing are posing a threat) and Uber (as conventional taxi systems in many countries have proven difficult to successfully integrate and collaborate with).

Defined Terms

*Dotcom bubble

A bubble created in the early era of the Internet, where companies had their valuation raised simply because they added an "e-" before or ".com" after the name.

**Housing bubble

An increase in house prices driven by demand and risky speculation. Many commentators believe this to be the start of the recession that commenced in 2007.