What are unicorn startups and how can one invest in them?

Unicorn startups
Created by Unicorn startups Jun 30, 2021

What are unicorn startups and how can one invest in them?

Unicorn startups, if chosen right, are multi-baggers. However, the risk is relatively high. Fast-growing startups are called ‘unicorns’ because they are too good to be true and very rare to find just like the mythical creatures. This, however, was the situation of the past; in today's times finding a unicorn startup is not that difficult. In fact, in 2020, there were around 500 of them globally!

Unicorn startups are a quintessential part of a high profit yielding investment portfolio and if you are interested in them, here’s everything you need to know before you start out-

A brief understanding of unicorn startups -

Any startup that reaches a billion dollars valuation before going public is called a unicorn startup. These private ventures achieve this quotation by making sales and capitalizing on a significant piece of their target market. Even the startups that have not yet grown that huge but have an innovative product or business model and offer a very promising potential of success, are often regarded as unicorns by the investors. A few examples of unicorn startups that are present in the current market are SpaceX, Robinhood, Revolut, Stripe, ByteDance, and Grab.

The trick of the play here is to invest in a unicorn at the right time. Getting in late means losing out on a huge profit potential while investing too early exposes the investor to higher risks. Industries like IT, fintech, and health tech have seen a significant upsurge in the number of unicorn startups present in the market today and this is solely because of the humongous scope of innovation they carry. There were only 39 unicorn startups present across the globe back in 2013 when the term had just been introduced, the number has grown ever since and has reached a count of 488 in 2020!

To find out the valuation of a startup, just check how much money they raised in the latest round of funding and you would know how much the investors are ready to pay to become part of the young startup’s journey. However, these sums are rather huge and can reach millions or even billions of dollars. As an investor, you need to keep in mind that investing in such revolutionary startups can be quite risky as there is a higher probability of the new idea failing and a prime example of that is the failure of WeWork in 2019.

Why are unicorns one of the best investment options in today's day and age?

Unimaginable returns on investment - A unicorn startup that becomes successful can shower its investors with money. To back this claim with an example - Nasper, a South African firm paid $32 million to Tencent for a 46.5% stake in their company in 2001, by 2019, this investment had inflated to a magnanimous value of $131 billion! Early investors who pitched in a max of $500,000 for companies like Facebook, Google, Apple, Microsoft or Tesla, have now become billionaires. The ability of a unicorn startup to turn into the most profitable investment for an individual is what makes it one of the best assets available in the market today.

Become a part of the revolution - The majority of the unicorn startups present in the market today have reached their status solely based on their revolutionary ideas and are still in the process of backing their claims with a track record. However, investors that gauge the potential of such ventures successfully and make a sound investment call regarding them are often rewarded handsomely. They not only get massive returns but even get the chance to be a part of the revolution that changes the market landscape forever. A suitable example for this would be about the investors of the company Amazon - they not only got a pump in their net worth but even contributed to shifting the consumer behavior from offline shopping to online.

What are the drags of a unicorn investment?
Along with the pros follow the cons. Here are the 3 major drawbacks of a unicorn investment -

  1. Lack of a proven track record - Many invest in startups based on the vision of the entrepreneur and trust their ability to achieve it. This is a very popular method and allows the investors to become a part of the startup’s journey at a very early stage. This helps them to maximize the returns they expect to receive on their investment; however, all that shines is not gold, and similarly many times the promises made by the entrepreneurs go unfulfilled.

  1. Requirement of a high-risk tolerance - Since these unicorn startups aim to the change consumer behavior in their favor, their initial stages are always a cash burnout. As an investor, you need to understand whether the spent money is actually doing any good or is just being lost without any use. Even in the most opportunistic field of technology, only 0.7% of the startups have the potential to turn into unicorns, and hence the chances of making a profitable investment call are very low. Investing in unicorn startups is thrilling, with high risk and high reward. Getting involved with them is like sitting on a roller-coaster; only if you have the stomach for it will you enjoy it.

  1. Unrealistic valuations - Visions that the entrepreneurs bring to the market are often too good to be true. It is natural for such ventures to be overvalued and amidst the hype, the investors can easily fall for these inflated quotations and invest in the startups that were just about the talks and not performance. It is reported that an average unicorn is overvalued by almost 48% and some even get inflated valuations that are above almost a 100% of their real worth!

How can you make unicorn startups a part of your investment portfolio?
To get involved with such highly promising ventures, one would easily require millions of dollars even to make an entry-level investment. These ventures traditionally are only accessible to the entrepreneurs who lead them, angel investors, and the employees as the capital requirements are usually out of the reach of the many retail investors.
However, with ADDX, accredited investors can make unicorn ventures a part of their portfolio for just $10,000 and require only $100 to trade!

Wondering what makes you an accredited investor?
Fulfilling either of the following criteria makes you an accredited investor -

  1. Your annual income should be at least $300,000, or
  2. The net value of your financial assets should not be less than a million dollars, or
  3. The total assets you own should be of at least $2,000,000

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

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