How to Invest in Unicorn Companies

Unicorn companies are privately held startups valued at over $1 billion. These often attract investor attention due to their innovative approaches, rapid expansion and potential for further growth. Early unicorn investors such as venture capitalists , hedge funds and private equity firms can enjoy large profits. However, direct unicorn investment is typically limited to accredited investors. Unicorn investments also may be characterized by low liquidity, high volatility, unclear valuation and limited disclosure requirements that mean there is a real possibility of losing the entire investment.

If you want to build an investment portfolio, a financial advisor can work with you to analyze and manage investments.

What Is a Unicorn Company?

A unicorn company is a privately held startup that has reached a valuation of over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee to emphasize the rarity of such startups, much like the mythical unicorn. These companies often represent the cutting edge of innovation, frequently operating in industries like technology, fintech and biotechnology. They achieve rapid growth through disruptive business models, attracting substantial investments from venture capital firms and private equity investors eager to capitalize on their potential.

Unicorn companies are generally not listed on public stock exchanges, meaning their shares are not readily available to the general public. Instead, they rely on private funding rounds, where investors who meet accredited investor criteria can participate. This means their shares are less easily sold than shares of public companies.

Valuation of unicorn companies is largely based on an assessment of future growth potential rather than a record of current profitability. As private companies, they are exempt from the strict disclosure requirements placed on public firms. Given these limitations, while they offer the allure of significant returns, the lack of liquidity and the volatility of their markets pose considerable risks to unicorn investors.

The success of unicorn companies is often driven by their ability to scale rapidly and capture a large market share, but this success is not guaranteed. Some unicorns may struggle to maintain their growth momentum or may face challenges such as regulatory hurdles, intense competition or changes in market conditions.

How Investing in Unicorn Companies Works

Generally speaking, only knowledgeable and well-heeled accredited investors can invest directly in unicorn companies. The process usually begins with gaining access to private equity, venture capital or hedge funds that are participating in late-stage funding rounds. These firms pool capital from multiple investors to buy ownership stakes in unicorn companies seeking funds to grow their businesses.

As these startups are not publicly traded, the investment is generally illiquid , meaning it can be difficult to sell your stake before the company goes public through an initial public offering (IPO) or is acquired by another firm. Successfully executing one or more of the available exit strategies is necessary for backers to turn their ownership shares into cash.

While early investors in unicorn companies sometimes earn 10 times or more on their initial investment, there is no way to know for sure in advance which companies will grow to unicorn status and which will wind up bankruptcy. Given these risks, potential investors must investigate thoroughly before committing funds.

Indirectly investing in unicorns by purchasing shares of mutual funds or exchange-traded funds with ownership stakes in the startups offers an alternative method. This has the advantage of being open to the average investor. Anyone can buy shares, liquidity is high and since funds hold a basket of unicorns, diversification is boosted and risk is mitigated. Destiny Tech 10 (DXYZ) is a closed-end fund that focuses on unicorns. Investors can also search fund holdings from major investment companies such as Fidelity and Vanguard to find those with investments in unicorns.

Examples of Unicorn Companies

Approximately 1,400 exist unicorns worldwide , about half based in the United States. Most are in technology businesses, including software, financial technology, e-commerce and artificial intelligence.

One of the most well-known unicorns is SpaceX , founded by Elon Musk. Specializing in aerospace manufacturing and space transportation, SpaceX has revolutionized the industry with its reusable rockets and ambitious missions, earning it a valuation of well over $100 billion.

Another prominent unicorn is Stripe, a fintech company that has transformed the way businesses process online payments. Founded by brothers Patrick and John Collison, Stripe has become a backbone for many e-commerce platforms. With its innovative approach to online payments, Stripe has garnered a valuation of over $50 billion, making it one of the largest unicorns in the financial technology sector.

Like these examples, unicorns typically employ sophisticated technology in innovative ways that significantly disrupt the industries in which they operate. While SpaceX and Stripe are business-to-business enterprises, many unicorns are in consumer-facing markets.

How to Evaluate a Unicorn Investment

Evaluating a unicorn investment requires careful consideration, as these high-value startups come with both significant potential and substantial risks. Before committing funds, investors should thoroughly assess several key factors to determine whether the investment aligns with their financial goals and risk tolerance . Considerations include:

• Market potential : Assess the size and growth potential of the market in which the unicorn operates. A strong market with increasing demand can enhance the company’s prospects for sustainable growth.
• Business model viability : Evaluate whether the company's business model is scalable and profitable. This includes analyzing how the company generates revenue and whether it has a clear path to profitability.
• Competitive landscape : Consider the level of competition in the market. A unicorn in a highly competitive field may have difficulty maintaining its growth trajectory, while one with a unique value proposition might have a stronger edge.
• Management team : The experience and track record of the company's leadership are crucial. A strong management team with a history of successful ventures can be a good indicator of the company's ability to navigate challenges and capitalize on opportunities.
• Financial health : Review the company's financial statements, including cash flow , revenue growth and debt levels. Be aware that unicorns may not actually be generating profits, and may not be able to forecast exactly when they will become profitable. Strong financial health suggests stability and the capacity to weather economic downturns until they can produce sustained net income .
• Exit strategy : Understand the potential exit opportunities, such as an IPO or acquisition. Knowing how and when you might be able to liquidate your investment is essential for planning your financial future.

Bottom Line

Investing in unicorn companies offers the potential for substantial returns. Although, it comes with significant risks. These high-growth startups can disrupt entire industries and deliver impressive gains, but their valuations often hinge on future potential rather than current profitability. As these investments are typically limited to accredited investors and involve private markets, they require careful consideration and thorough due diligence.

Tips for Investment Planning

• If you want to invest in a startup business, a financial advisor can help you identify opportunities and determine the risks. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Investing in unicorns can be part of some investors' portfolios, but a well-balanced set of investments typically includes a variety of asset types. SmartAsset's asset allocation calculator can help you design a portfolio that supports your personal risk profile and investment horizon.

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