Illustration by Rachel Revilla
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,” which was based on her firm’s study of US-based private tech startup companies with valuation of $1 billion or more. 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, about his concept of a unicorn. Instead of quantifying an amount (i.e., $1-billion valuation) or limiting it to the type of company (i.e., startups), he considers as unicorn “a business that is extremely successful in such a short time … with rapid acceptance that makes the difference.”
Lee’s study was limited to US tech startups from 2003-2013 when venture capital flows to Asia were only 15 percent of what was available in America (Credit Suisse estimate). As of this writing, the biggest unicorn in the world, Bytedance, is from China, worth $300 billion—much more than United States’ current No. 1 unicorn, SpaceX, valued at $127 billion. Both are called hectocorns (companies valued at over $100 billion). Shein from China is third biggest, valued at $100 billion.
Despite opening itself to the global economy only in 1978, China overtook the United States in 2019 based on the number of unicorns. China has now slid back to second place. The United States and China have a combined 71 percent of the world’s 1,312 unicorns as of end-June.
Startups, spinoffs
China has 312 unicorns, 24 percent of worldwide total as of end-June. Aside from startups, there have been 49 unicorns born as spinoffs from established companies, 48 of which are from China (Hurun, December 2021).
Spinoffs are independent entities created by parent companies to behave like startups while being supported by the latter’s resources and stability. 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 called “BAT,” are first-generation super-unicorns that are now active institutional investors themselves, with equity in at least 23 percent of all unicorns in China (PwC estimate).
E-commerce giant Alibaba gave birth to ANT, its digital finance arm, while Ping An, China’s leading private insurance company, spun off several unicorns such as HealthKonnect, which is into health-care services and health management.
Whether startup or spinoff, unicorns must be private companies with valuation of at least $1 billion and with equity participation from outside investors. Once they go public, they could no longer be classified as unicorns.
Unicorns are mostly in fintech, software as a service, e-commerce, artificial intelligence, health tech, cyber security and biotech, in that order. On average, it takes about eight years to become one, with an exceptional few attaining it in three years or less. On average, unicorn founders set up their company when they were 36 years old (Hurun).
Parent companies spin off not just to have another source of revenues and profit, but also to be part of their ecosystem, to strengthen their architecture in delivering value proposition. For instance, the investment in Chinese ride-hailing giant Didi by Tencent, creator of WeChat, allowed WeChat to highlight Didi in its app when it was just starting.
Like startups, these spinoffs help drive innovation, attract better valuation and create competitive advantage for the parent. Thus, spinoffs can enhance the parent’s reputation, particularly its employer brand in talent acquisition and retention. Over 70 percent of the Top 30 Innovations in the world had been conceived, developed and commercialized by employees working in established companies (Driving Innovation From Within by Kaihan Krippendorff, 2019).
These unicorn spinoffs are not limited to China. The Philippines, for instance, has GCash, a fintech company associated with Globe Telecom and Alibaba, with valuation of $2 billion. GCash was among those recently recognized in the second 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 China’s BAT, some of the biggest US-based giants like Microsoft, Apple, Amazon and Alphabet are not as actively investing in potential unicorns.
Perhaps we can update the definition of a unicorn as “private startup or spinoff companies with valuation of $1 billion or more,” given the changes in the dynamics in the business landscape, particularly how the mindsets and behaviors of startups and spinoffs may have more in common than previously thought of.
How to be a unicorn
I have been studying companies that attained unicorn status in China or have gone public. In my talk entitled “Business Model Innovation of China’s Unicorns” last January 2022, I shared four cases in my portfolio. 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 were not limited to serving the existing customers. They attracted noncategory customers that enlarged their pond to “catch more fish.” They then introduced more products and services to serve the enlarged market base.
3. Scale
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 percent of unicorns sell physical products (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.
6. 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 United States 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. —contributed
Josiah Go is chair 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 to Oct. 27. Free registration via www.day8.org.