Ten years ago, companies like Instagram, GoJek, Robinhood, Snapchat and Coinbase didn’t even exist. Today, they are household names and each is worth billions. Many of the most dynamic and best-known companies around world are or have been unicorns - privately held startups with a valuation of over US$1 billion. This shouldn’t be surprising. The highest growth and return periods of most companies today occurs when they are still in the pre-public stage.

But what factors should you keep in mind when making your first unicorn investment - particularly at a time when a global pandemic and a worldwide economic downturn are radically reshaping business models and consumer trends?

1. Understand The Industry Landscape

Analysing and understanding the industry and the competitors that a unicorn is involved with is of paramount importance, particularly since many unicorns are still in the cash burning stage. For example, while some, such as those in the ride-hailing and travel industries, were able to gain footing in the past due to the rigid state of those industries, they may now face headwinds due to the global economic slowdown, pandemic-related travel restrictions and public fears of infection. Other unicorns, such as such as those in e-commerce and cloud computing, may fall victim to pressure and price wars from the more established and cash-rich players now entering their marketplace. The point here is to carefully consider both the company and the larger environment in which it exists when making your investment.

2. Understand The Business Approach Of Unicorns

Recent unicorn can be divided into two broad categories:

a) Super-Apps

Super-Apps offer a diversified set of services (such as Grab or WeChat). These have the advantages of easily reallocating resources among business lines should business climates change and, depending on how closely related these offerings are in the value chain, can enjoy synergies as users need not switch platforms.

b) Focused Unicorn Models

Focused Unicorns, on the other hand, generally offer one core service. These generally have faster product development cycles and can quickly gain market share in their chosen field.

Both approaches have advantages and disadvantages. While a Focused unicorn within a growth industry may be very well positioned to itself grow rapidly, Super-Apps within industries that are now experiencing headwinds are likely to be more resilient to change and better placed to pivot to alternate business models. An example here would be ride-hailing services like Grab ramping up food delivery and other additional services.  

3. Keep An Eye On Key Advantages

Investors should carefully consider a company’s competitive advantages versus its competitors to gauge its potential to capture, grow, and retain market share over time. Most successful unicorns have innovative technologies that allow them to supplant existing services at more economical price points, or have more efficient and streamlined consumer experiences, or both. A company’s already captured user-base can also be a competitive advantage, as people tend to be reluctant to switch between digital platforms unless given significant incentives. In any case, a savvy investor should carefully research and consider a unicorn’s key competitive advantages before investing.

4. Management Team

Management teams can heavily impact the success of a company, especially during a pandemic such as COVID-19. Professional background and track record in the industry, as well as favourable results with previous unicorns can all serve as indicators for potential success. Although past performance is no guarantee of future results, it cannot be ignored. Top-level executives with shareholdings in the business can also be a sign that management and shareholder interests are aligned.

5. The Company’s Financial Health And Performance

In a global recession where investors are more selective on which companies to back, a unicorn company’s financial health and performance should receive much greater scrutiny. In particular, a company’s operating cashflow and cash-burn rate (the rate at which a new company is spending its capital to finance overhead costs before profits) should be at the forefront of your considerations when assessing its future prospects. Customer acquisition cost and lifetime values are other metrics to factor, as the cheaper it is to attract and retain new customers, the higher their odds of success, all else equal.

6. Key Investors

High profile or strategic shareholders can be another important factor to consider since they can help the company raise future capital and find new business opportunities. This is key especially for unicorn companies that may have relatively higher cash burn rates that require them to consistently raise capital to stay afloat.

7. The End Game Is Important

A unicorn company with plans to list in the public markets or which has great potential to be acquired are important considerations for investors, as an IPO (Initial Public Offering) or acquisition will generally increase the value of shares held and allow greater liquidity for your investment.

ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.