Unicorn

A unicorn is a young company that, in the estimation of its backers, is worth at least one billion US dollars. Importantly, these companies are not publicly traded, so you cannot simply buy their shares. Instead, the value results from negotiations with investors who exchange money for company shares. The English word means a mythical horned creature and was coined in 2013 by investor Aileen Lee. She wanted to express how rare such companies were at the time. Today there are more than a thousand of them worldwide, so the fabled creature has become considerably more common.

Why the billion-dollar mark makes headlines at all

The one-billion threshold is arbitrarily chosen. Nevertheless, it has an enormous effect because it allows for a simple sorting mechanism. Whoever reaches this status is regarded as a serious player and gets attention from the press, customers, and job applicants. For a startup competing for skilled workers, this is a real advantage.

For investors, the number is also a rough measure of progress. Venture capitalists put money into many risky companies and know that most of them will fail. Their profit depends on the few that grow extremely large. A unicorn in one’s own portfolio can offset all the losses from the other investments.

At the same time, experts warn against confusing the title with success. A high valuation says nothing about whether a company is making a profit. Many unicorns burn through large sums every year and hope to become profitable later. The payment service Klarna, for example, was at one point valued at 45 billion dollars and a year later at just under seven.

How the billion-dollar valuation comes about

Young companies raise money in so-called funding rounds. An investor pays a sum and in return receives a stake in the company. From these two figures, the total value can be extrapolated. Whoever pays 50 million for five percent thereby mathematically values the whole company at one billion.

This calculation has a catch. It assumes that all the remaining shares are worth exactly as much as the ones just sold. That doesn’t have to be true. New investors often secure special rights for themselves, for instance that in the event of a sale they get their money back first. Such clauses make their shares more valuable than those of the founders, which flatters the overall figure.

You can think of it like an appraisal when selling a house. As long as nobody actually pays, the price remains a claim. Only an IPO or a sale reveals what the market is truly willing to give. Not infrequently, this price ends up well below the last valuation.

Unicorns in the AI industry and in the news

Particularly many unicorns are currently emerging around artificial intelligence. Companies such as Anthropic, Mistral AI, or the German company Helsing reached the billion-dollar mark within just a few years. The reason is the enormous capital requirement: training large AI models consumes data centers and electricity on a scale that small funding rounds cannot cover.

In business news, the term usually appears in two situations. Either a company newly reaches the status, in which case there is talk of a new unicorn. Or a valuation collapses, in which case one reads about a fallen unicorn. Both types of reports describe valuations, not revenues.

There are also intensified forms. From ten billion dollars onward, one speaks of a decacorn, and from a hundred billion onward, of a hectocorn. Anyone reading such reports should always ask two questions: Where does the number come from, and has anyone actually paid that much?