Unicorn is a term introduced by US venture capitalist Aileen Lee in her 2013 article “Welcome to the Unicorn Club: Learning From Billion-Dollar Startups.” In her article, she shared her firm’s study of US-based private tech startup companies with valuation of US$1 billion or more. In the footnote of her article, she noted that “the term ‘unicorn’ is not perfect – unicorns apparently don’t exist, and these companies do – but we like the term because to us, it means something extremely rare, and magical.”
I asked a successful private equity investor Danny Lizares of Sierra Madre his concept of a unicorn, and instead of quantifying an amount (i.e., US$1 B) or limiting it to the type of company (i.e., startups), he considers a unicorn company as “a business that is extremely successful in such a short time … with rapid acceptance that makes the difference”. This characterization is still consistent with Lee’s practical description that unicorns are extremely rare and magical.
Lee’s article was limited to US tech startups from 2003-2013. Then, the venture capital funds flowing to Asia was only 15% of what was available in America (source: Credit Suisse). As of this writing, the biggest unicorn in the world, Bytedance, is from China, worth US$300 billion, which is much more than US’s current number 1 unicorn, SpaceX, valued at US$127 billion; both are actually called hectocorns (or companies with valuation of over US$100 billion). Shein from China is third, valued at US$100 billion. In fact, in 2019, China, despite the short time the economy opened in 1978, took over from the US with regard to the number of unicorns. As of this writing, China is back in second place in total number of unicorns. USA and China have a combined 71% of the world’s 1,312 unicorns as of the end of June 2022.
Unicorn Startups and Unicorn Spinoffs
The rise of China in the ranking of unicorns inspires a look into how some of their unicorns became such.
As of June 2022, China has 312 unicorns, or 24%, of 1,312 unicorns worldwide. Aside from startups, there has been unicorns born as spinoffs from established companies. In fact, out of 49 unicorns identified from spinoffs, 48 are from China (source: Hurun, Dec 2021). Spinoffs are independent companies created from parent companies in order to have the benefit of behaving like startups while being supported with the resources and stability of the parent. Investors love spinoffs in that they have the single-mindedness of startups while benefiting from the track record, ecosystem and discipline provided by their parents. China’s Baidu, Alibaba, and Tencent, collectively referred to with the acronym BAT are first-generation super-unicorns that are now active institutional investors themselves, with at least 23% of all unicorns in China having their investment participation (source: PwC). Ecommerce giant Alibaba, for instance, gave birth to unicorn spinoffs such as ANT, their digital finance arm, while Ping An, China’s leading private insurance company, also set up several unicorn spinoffs, for example – HealthKonnect, in healthcare services and health management. But whether as a startup or from spinoffs, they are private companies with valuation of at least US$1 billion with outside investors. They actually have more unicorn spinoffs in the past but their herds went public in the stockmarket, hence, can no longer be classified as unicorns.
The most number of unicorns can be found in fintech, software as a service, e-commerce, artificial intelligence, healthtech, cyber security and biotech in that order. The average number of years before becoming a unicorn is eight years with an exceptional few attaining it in three years or less. On the average, unicorn founders founded their company when they were 36 years old (source: Hurun).
Parent companies create spinoffs not just to have another source of revenues and profit other than their core business, but also to be part of their value chain or ecosystem, giving them added strength in their value architecture in delivering their value proposition. For instance, the investment in Didi, the ride hailing giant in China, by Tencent, the creator of WeChat, allows WeChat to highlight Didi in their app when they were just starting.
Like startups, these spinoffs help drive innovation, attract a better valuation, and create a competitive advantage for the parent. Established companies can draw in more bright employees without much resources and ecosystem, thus, spinoffs can enhance the parent reputation particularly its employer brand in talent acquisition and retention. In fact, over 70% of the Top 30 Innovations in the world were conceived, developed and commercialized by employees working in established companies (source: Driving Innovation From Within by Kaihan Krippendorff, 2019).
Needless to say, these unicorn spinoffs are not limited to China. The Philippines, for instance, has GCash, a fintech company closely associated with Globe Telecom and Alibaba, with last valuation of US$2 billion. Truly rare and magical. GCash, along with 7 other companies in the Philippines, recently were recognized in the 2nd Mansmith Innovation Awards.
It is therefore important to update our understanding of Lee’s 2013 concept of unicorns, to include market realities of spinoffs worldwide instead of being limited to US tech startups. Unlike the “BAT” in China, some of the biggest US-based giants like Microsoft, Apple, Amazon and Alphabet are not as active investing in potential unicorns.
Or perhaps, we can update the definition of a Unicorn as “private startup or spinoff companies with valuation of US$1 billion or more,” given the changes in the dynamics in the business landscape particularly how the mindsets and behaviors of start-ups and spinoffs may have more in common than previously thought of.
How to be a Unicorn?
I have been studying companies that have attained unicorn status in China or went on to become successful publicly-listed companies. I have in fact presented a talk entitled “Business Model Innovation of China’s Unicorns” last January 2022, sharing four of the many cases in my portfolio, including Shein. Preliminary findings on how these companies became unicorns reveal six indispensable ingredients.
1. Innovative product concept
A good product concept offers a compelling benefit and reason to switch preference from either status quo or market substitutes. The new concept must offer features and benefits that are desired by the target market.
2. Untapped market with unsolved problem
Instead of brand switching tactics, many new unicorns offer a new value by creating a new category different from what is available in the marketplace. But they did not limit to serving the existing customers. They attracted non category customers that have enlarged their total pond to “catch more fish.” They then introduced more products and services to serve the enlarged market base.
It is only through a combination of a large untapped market size and a compelling value proposition that word-of-mouth and fast adoption can be triggered — attracting both customers and noncustomers, moving from enticing early adopters to early majority, and eventually becoming a mainstream choice, passing the scalability test. Digital tech is a critical enabler to scale faster without the typical tension of traditional products and service. Only 19% of unicorns sell physical products (source: Hurun).
4. Winning Business Model
A good product may not have a good business model to capture value. Among others, value chain or ecosystem, as well as innovation must be planned well in the firm’s business model, not limited to the usual value proposition that may not have anything innovative. Constant pivoting is required until the business model attains soundness – financial soundness, value soundness and operational soundness.
5. A Reliable Team
Having a good team with good teamwork makes all the difference in the fast scaling effort, which leads to greater confidence in gaining funding.
Continuous external funding provides a critical role beyond continuity – as a source of validation of the product concept and the business model. Absence of continuity can lead to bankruptcy of some unicorns, as can be seen in a few bike rental companies in China, or some of the solar companies in the US in the past. It is important to recognize that other than customers, the confidence of suppliers and investors are indispensable.
With the failure rate of businesses running high, let us celebrate the triumph of the entrepreneurial spirit, the wisdom of innovators, and welcome unicorn startups and unicorn spinoffs who think differently, see things differently and do things differently.
Josiah Go is Chairman and Chief Innovation Strategist of Mansmith and Fielders Inc., winner of Innovation Awards in the 2021 ASEAN Business Awards. The 5th Entrep Summit featuring “4 Gates of Entrepreneurship” is scheduled on Oct 26-27, 2022. Free registration via www.day8.org
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