In 2013, Aileen Lee, the founder of a Venture Capital company by the name of “Cowboy Ventures” coined the term unicorn to refer to a privately held start-up with a value in excess of $1bn. The implication was, and still is pretty clear. That these companies are so rare as to be almost mythical. The term caught on, and is now in common usage.

But unlike actual unicorns: magical horses with horns, these tech start-ups known as unicorns actually do exist, and their numbers are growing.

What is a unicorn in the tech world?

When someone refers to a unicorn in the tech world most people immediately picture companies like Facebook, Google, or Amazon, but none of these tech behemoths actually fit the criteria as they are no longer in private ownership. But they were once. And in reality there are many more companies that are classed as unicorns that you probably haven’t heard of. A company can be worth only a small fraction of Amazon and still be a unicorn

So let’s actually break the numbers down.

There are many different ways to put a value on a business, and in reality unless someone is willing to pay it then it is just a vanity number. It’s also worth bearing in mind that valuations are usually based around selling a small amount of your company and it’s not always the case that you could find someone to buy the rest at that price!

For the purposes of this article we will take one of the simplest that is often applied when valuing SaaS business:. An arbitrary multiple of annual revenue.

Justifying the multiple is the trickiest bit, and there is a wide variance based on the kind of business you have but they typically range from 5x-20x (although some can command 40x or more if they are especially hot tickets)I’m not going to go into this here as it deserve sits own article (I’ll hold you to that - Ed), so for the purposes of the example I’ll pick one from somewhere in the middle - 10x

So with that in mind a company commanding a 10x multiple needs Annual Reccuring Revenue (ARR) of $25M to justify a valuation of $250M. $25M multiplied by 10 equals $250. To get to a $1Bn valuation would mean ARR of $100M.

Obviously we are ignoring all the important stuff like EBITDA, actual profit, projected growth, weighted pipeline, perceived future competition and so on, but while an annual revenue of $100 is an astonishingly big amount, it definitely isn’t so big as to be mythical.

How many unicorns are there?

It’s not an easy task to try to work out how many unicorn tech companies there are in the world, but According to CB Insights, a research firm that tracks private companies, investments and acquisitions, at the time of writing there are 837 companies that fulfil the criteria of being a unicorn globally, Embroker.com puts the number at 554. While those are quite different numbers it points to there being hundreds, maybe over a thousand such companies.

Here in the UK, Beauhurst - lists 34 companies with a value of over $1Bn that are still privately owned.

How do unicorns grow?

There is no one method for growing a company to unicorn status, but there are a few things that are true for the vast majority of companies that have got there, at least during their high-growth phase.

They have nailed product market fit.
They have a product that is perceived as an effective solution to a genuine problem.
They have good people who can execute on their goals.
They are built to focus on growth rather than profit
They focus on doing one thing as well as they can
They are persistent yet can move quickly when they need to

Are unicorn companies profitable?

Profit often isn’t the focus for a company on the path to unicorn status. At least not during the growth stages. They tend to focus on perfecting the product, and growing market share, and revenue.

Nutanix, a tech company that hit unicorn status in 2013 did so without any profits at all. But their product was good enough, their vision clear enough, and their ability to deliver solid enough that investors were happy anyway.

What are the odds of starting a unicorn?

This is where we come crashing back to earth. The chances of you starting a company and becoming a unicorn are somewhere between extremely small and non-existant.

There were 4.2 million companies on the UK register at Companies House at the end of 2019. Even if we assume this number has remained stable (it hasn’t, it will have grown, it does every year but the government don’t release the stats very quickly) then the ratio of unicorns to limited companies is 1 in every 123,529.

So the chances of your company becoming a unicorn are not great. But as we said at the start, these unicorns do exist, and just because the odds are stacked against you doesn’t necessarily mean you shouldn’t aim high.

Is it worth trying?

If all you care about is owning a company that is worth a billion dollars then I’d probably advise you not to go down this route.

It is not an easy path. It requires sacrificing your family life, your friendships, any hobbies you may have, and at the risk of sounding dramatic, everything you hold dear in service of a business that will probably never get where you want it to get to.

But that doesn’t mean you should give up on the idea of the business.

In fact I’d probably go as far as to say that if you stop focusing on the unicorn status, and just try your very best to build the best business you can, that solves a genuine problem for as many people as possible then you are actually more likely to get there.

After all, Facebook wasn’t originally set up to make billions. It was set up to help people from university connect online. And it did that so well everyone else wanted to get involved.

What are the chances of being the next tech unicorn?