Key takeaways

• Unicorns are fast growing private startups that are valued at US$1 billion or more
• Investing early in a unicorn that delivers on its promise can generate huge returns
• Unicorns are no longer as rare as they once were – as of 2020, there are almost 500 globally
• Investing in unicorns is a very high-risk/high reward venture

What are Unicorns?

Unicorns are the rare private companies that achieve a valuation of US$1 billion prior to listing on a public stock exchange. Many of today’s most dynamic and dominant companies are or were unicorns, including the likes of Robinhood, Tesla, Revolut, Stripe, SpaceX, Grab and ByteDance.

Venture capitalist Aileen Lee coined the term unicorns in 2013 to describe those companies that were as rare as the mystical beast. These days, however, there are a few more around with CB Insights putting the number at 488 as of August 2020 compared with 39 when the label was first introduced.

For those investors lucky enough to invest early in a unicorn, the returns can be huge. In 2001, for example, a unit of the South African firm Naspers paid US$32 million for a 46.5 percent stake in Tencent. As of 2019, the value of that stake had grown to US$131 billion.

Unicorns can predominantly be found in the technology space, with the bulk of the companies in the US and China. They range from companies that solve consumer problems, to fintech players and, because of the pandemic, tech-driven healthcare services.

They achieve their vaunted status for one of two reasons: they have made the sales to justify the billion-dollar-plus company valuation, or they are so revolutionary that investors are willing to take a chance on their business proposition before there is the financial evidence to back it. Most fall in the latter category.

Their value is based on their most recent round of funding. Thus, it reflects what the investors are willing to pay to get a stake in the business rather than underlying business fundamentals or what investors on a public stock exchange would be willing to pay.

Some unicorns may not deliver on their promise, with WeWork’s failure to list in 2019 a prime example. Investing in unicorns is an inherently high-risk, high-reward affair.

What are the advantages of investing in Unicorns?

• Potential for Very High Returns – A unicorn that is successfully brought to IPO has the potential to offer returns the likes of which an investor may never experience again. Take entrepreneur and venture capitalist Peter Thiel’s experience as an early Facebook investor as an example; Thiel bought into Facebook in 2004 with a US$500,000 stake. By the time he sold off the last of his shares in 2012, he had earned over US$1 billion.
• May Be the Next Big Thing – If you chose well, the unicorn you invest in may turn out to be the next Google, Amazon or Facebook. These companies have changed their respective industries beyond recognition and are now dominant market players. Identifying the next big thing is becoming more difficult, however, as the competition intensifies in the industries that have been the traditional domain of unicorns over the past two decades.

What are the disadvantages?

• Performance is Unproven – Many of these mega-start-ups don’t yet have the business performance track record to prove conclusively that their business proposition works. Instead, investors are buying into the founders’ vision of how they will create a service or product that is ground-breaking and will ultimately be successful. Unicorns may not be profit-generating as private companies and may still not make profits as publicly listed companies. For instance, Uber has yet to make a profit even though it was listed in 2020.
• High Risk – At the time Lee came up with the term unicorn, the venture capitalist’s research found that only 0.7% of technology startups would become unicorns. Thus, the prospect of failure is high, and there’s no sure way of knowing if you are investing in one of the successes.
• Overvaluation – The valuation of unicorn startups are, in effect, a bet on the prospects of the company – and, with all the hype surrounding these mega-start-ups, the chances of a company being overvalued can be high. The only way for an investor to determine whether, and by how much, a unicorn is overvalued is when the company is listed on the stock exchange and the broader public market has its say on the true worth of the company.

Who can invest in Unicorns?

Other than founders and their early employees, only those ultra-wealthy enough to invest in venture capital (or to act as angel investors) have had access to unicorns.  The high minimum investments required to invest in a venture capital fund – which can often be up to a million dollars or more -  have traditionally put them out of reach for the vast majority of individual investors.

ADDX, however, democratizes venture capital investing by making potential unicorns available to investors for as little as S$10,000 to participate in primary offerings and as little as S$100 to trade.

To qualify as an ADDX investor, investors need to meet one or more of the following conditions:

•Yearly income of at least S$300,000 or

•Net financial assets of at least S$1,000,000 or

•Net total assets of at least S$2,000,000

The Bottom line

The prospect of investing in a billion-dollar-plus private company that may become the next Amazon is compelling. The reality is that finding that rare beast can be easier said than done. Investing in unicorns is a high risk/high reward proposition and you should never invest more money than you can afford to lose.

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.