Early Investing

How Early Investors Can Profit From the Unicorn Explosion

How Early Investors Can Profit From the Unicorn Explosion
By Andy Gordon
Date September 1, 2021

Unicorns used to be a rare breed. Not anymore. 

When Aileen Lee of Cowboy Ventures first coined the term “unicorn” — referring to startups worth $1 billion or more — in 2013, she identified 39 unicorns. The vast majority were valued below $5 billion. Apart from Facebook, the average was $3.6 billion. And 27 of them were based in the San Francisco Bay Area.

What a difference eight years makes!

2021 has seen a huge explosion in the number of unicorns. According to Crunchbase, the number of new unicorns has dipped below 39 in only one month of this year. In February, a mere 26 unicorns were born. The next lowest month, January, had 42. The highest so far was March with 58.

By comparison, the best-performing month for unicorns in 2020 only reached 24 companies — most months were much lower.  

As of the end of July, there were 942 unicorns in Crunchbase’s Private Company Unicorn Board. At their current rate of growth, unicorns will exceed the 1,000 mark sometime this month. They’re collectively worth more than $3 trillion. China-based ByteDance alone was valued at $180 billion in December 2020 and is now valued at $425 billion. Stripe boasts a valuation of $95 billion. SpaceX is valued at $74 billion. And when Robinhood went public in July, its valuation hit $32 billion.

The U.S. still dominates the unicorn club, but its membership is very much global. More than 150 unicorns come from China. Other major contributors include India, the U.K., Israel, Germany and South Korea.

Deal Flow Is Better Than Ever

So how does this explosion of unicorns from all over the world affect early stage investors? 

The chances of investors landing a unicorn are much higher than they were a few years ago. If you invest in a future unicorn at the seed stage, you’re going to make loads of money. But even 1,000 unicorns is a small fraction of the total universe of startups. Snagging a unicorn is still an extraordinarily difficult and rare feat. 

But since the number of startups valued at $1 billion and up has exploded, we can assume that the number of startups valued at $500 million or more has increased just as much, if not more. After all, it’s easier to reach a level of progress deserving of a $500 million valuation than a $1 billion valuation. Similarly, if $500 million startups are surging, we can assume that $300 million startups are too. And $300 million sounds pretty good when you’re investing in early-stage startups at valuations of $15 million to $20 million. 

What’s driving these bigger valuations? More capital is chasing a finite number of deserving startups — to the point where the amount of capital is overwhelming the growing number of excelling startups.  

Deal flow across the board has never been better.

Nowadays, everybody seems to want a piece of the startup investing space. Institutional investors from hedge funds, sovereign wealth funds, corporate startup funds, private equity funds and even mutual funds and pension funds are investing more in the startup space. And they’re driving up prices. 

Institutional investors are even getting into seed-stage startups. In a way, that’s surprising. Most institutional investors have historically avoided investing that early. But founders of these early-stage companies have done the math. If they’re going to be worth 30% more than anticipated down the road for meeting their milestones, the investment opportunity has more upside than previously thought. Later stage valuations are increasing to reflect this new calculus. 

Not every unicorn is accessible for U.S. investors — crowdfunders usually can’t invest in overseas pre-IPO startups. But nonetheless, U.S. investors should consider themselves lucky. They enjoy access to the biggest universe of startups because the vast majority of unicorns are based in the U.S. Every year the percentage of non-American-founded startups that find success gets bigger, which will become a problem for retail investors down the road. But it’s not a huge problem now.

In the meantime, the bar to build a successful early-stage startup portfolio has been lowered significantly. Unicorn hunting is fun — but remains a high-stakes game. And early-stage investors don’t need them to be successful. 

As an early investor, I only go after companies with unicorn-like upsides if the investing opportunity is derisked in some manner. Otherwise, I prefer investing in startups with estimated upsides of $300 million to $800 million. Even at the lower end of that range, profits are enormous. Getting a couple of $300 million startups in your portfolio isn’t easy. But the good news is that it’s not nearly as hard as it was just a year ago.

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