Explaining Unicorn Valuations

A unicorn valuation is when a startup undergoes valuation and that valuation exceeds one billion dollars. Generally speaking this term is only uttered in the halls of the venture capital industry, and is therefore for the purposes of investment. There are currently over a hundred such startup companies, and a new term, decacorn, has been created for those companies which reach over 10 billion dollars in valuation. You can see a listing of current unicorn companies here, provided by CB Insights. Almost all of these companies refer to themselves and are referred by the term "tech company."

Tech Company

The term "tech company" has become almost as much of a buzzwords as unicorn. While it would make sense that these "tech" companies are technology companies, these companies share more in common with each other (i.e. startups) than traditional technology firms. These startups tend to be mature, meaning they have not gone public yet. As Alex Payne, a company founder, investor, and consultant, explains, "If your product… consists of applied scientific knowledge that solves concrete problems and enables other endeavors, you are a technology company." Somewhere along the line these startups became "tech companies" which sounds cooler, but doesn't reflect their actual product, generally "software as a service."

The Problem with Unicorn Valuations

SnapChat, a photo-sharing social media platform for phones where media is deleted within 10 seconds of viewing, was valued at 15 billion dollars in its last valuation. Is this company actually worth the same as mature companies such as Clorox or Campbell soup? No, but investors are interested in the potential growth, the explosive growth such tech companies could produce, and it's this potential and sudden growth that is shown in these valuations. So the problem with these unicorn valuations is they are focused on hypotheticals and the hopes and dreams of their owners, not any physical assets, revenue streams, or even current spending that the company does.

Valuations for Startups vs. Established

The problem outlined above is the difference between a private "tech" startup and an established company in a mature industry. In the first it's the potential pipe dream of explosive growth, while in the second it is their assets, their established brand and connections, and their income, cash flow, and profits. It's a case of the "could be" of the tech company verses the "is" of the established business. Wondering about the basic types of valuations (and which might be right for which company)? Take a look at our articles on How to Value a Company.

Other Reasons for Valuations

Of course, selling your business (either to a buyer or investors) isn't the only reason to get a valuation, knowing the worth of a company can be vital for a number of reasons, below are a few from our page:

As a Stockholder: independent valuation on the worth of the company (and your shares in it).

In Estate Planning: the worth of your company and its fair division with other assets to your heirs.
In a Divorce: a rational division or buyout of a company owned by both parties.

Want to learn more about valuations and what they can do for your company? Contact George & Company, New England's premier business broker and valuation firm. Whether valuation or buying or selling a business, we'll discuss your situation and our services in the strictest confidence.