How can investors spot the unicorns, if they exist?

All investors like to spot the unicorns, don’t they? But how easy it is to spot them? Who really are the unicorns? Do they exist at all? Let’s find out.

First of all, the term unicorn can be misleading. $1 billion can just be an arbitrary number. “I think what is more interesting is companies hitting milestones like a million ARR (annual run rate), $10 million in revenue, $100 million in revenue, going public on a publicly listed stock exchange…,” Cack Wilhelm, Partner, Accomplice said at the NetEvents Global Press & Analyst Summit in San Jose. (Accomplice Management LLC, formerly the technology arm of Atlas Ventures LLC, focuses on early stage technology investments.)

Sometimes, the term unicorn could be useful only from a marketing point of view. Hiro Rio Maeda, Managing Director, Draper Nexus cited the example of a company that was acquired by HP. He said, “At that time the definition of unicorn doesn’t matter for the buyer. They just go through and scrutinise the number and try to come out with the right valuation and it came down (from $1 billion) to $600 million.”

So, given that unicorns is more of a marketing or media terminology, how do we distinguish the winners from the losers? Experts believe factors such as large addressable market, solving a genuine pain point or market gap, rapid market adoption, a sound business model, and a credible team are essential to be a winner. These are indeed some of the tick marks one would like to have in their checklist list. But those are never fool-proof and you still need to have an open mind and read between the lines.

If unicorns/winners are difficult to spot, then is it somehow possible to identify the losers when looking to invest? Sounds like another strategy? But according to Wilhelm of Accomplice, that’s a bad idea. She tried to spot the winners instead, tried to be open-minded and think of the possibilities if their business went well.

But, what you see is not always what you get. Sometimes, growing too fast can be a danger as well. For instance, Maeda said he hates to see a good company that grows too fast, loses control of the organisation and becomes a loser.

The good news is, investors will have more options to choose from in the next couple of years. Many startups focused on emerging technologies are likely to emerge winners and become “unicorns” by the generally accepted definition. “There would be more companies creating billions of dollars of value from displacing existing infrastructure or offering net new value, citing examples such as Blockchain and AI,” said Victor Chen, Associate, CapitalG. (CapitalG, formerly Google Capital, is a growth equity fund backed by Alphabet, Google’s parent company).