How to invest in unicorns

Have you heard the term ‘unicorn’ being thrown around in investing? It’s a popular topic, but what exactly is a unicorn, and how and why might you consider them within your overall investing strategy? Let’s take a look.

What is a unicorn company?

In the financial world, a ‘unicorn’ refers to a privately owned company valued at more than US$1 billion. Typically, these are later stage start-ups in the tech sector with high growth and quick or runaway success.

Like the mythical creature, when unicorn was first used by venture capitalists in 2013, these companies were rare. Examples of some of the first unicorn companies include household names like Uber and Airbnb. As with many unicorns these companies have gone from being privately held to being publicly listed.

Where are unicorns today?

It’s now estimated that there are as many as 800+ unicorn companies worldwide. And while less rare, they are still hard to access. One of the catalysts for investing in unicorn start-ups recently has been the new ways of living and working in the pandemic. Unicorns that have benefited, and have since listed on the Nasdaq, include video conferencing software company Zoom. Other factors driving the investing trend are low interest rates, and new technology trends such as artificial intelligence, mobile 5G, and edge computing.

Examples of Aussie unicorn companies

Unsurprisingly, the US and China produce most unicorn companies, but Australia is home to many innovative start-ups. The most high-profile Australian unicorn was software developer Atlassian, and in more recent times, buy now, pay later company Afterpay. Both of these companies are now publicly-listed.

Other unicorns (still privately held) include graphic design app Canva, which was recently valued by Forbes at $US40 billion, and Melbourne payments company Airwallex.

Waiting for a unicorn to go public

The availability of private equity funding can mean that unicorn companies are less likely to go public. Another thing that can happen is the unicorn gets bought by a larger company (as an example, the recent news of Square buying Afterpay) or what’s called special purpose acquisition companies (SPACs). However, there are many former unicorns who do go public. A recent example is US online broking firm Robinhood.

Platforms like Sharesies aim to keep investors in-the-know if a high-profile company has indicated it will go public. This includes providing as much information as possible and giving investors the opportunity to invest as soon as the company’s shares have begun trading on public markets.

Sometimes unicorns list at a premium price, which can exclude some investors as they may not be able to afford to buy in at. Investing through the Sharesies platform helps get around this because there’s no minimum amount—you can invest from as little as 1 cent! Remember too, the listing price is not reflective of the potential of an investment. You might decide to buy some time after an IPO and hold. As seen with Afterpay, prices can fluctuate over time.

How to invest in unicorns companies?

It’s possible to invest in a former unicorn company through specialist exchange-traded funds (ETFs) accessible through some investment platforms such as Sharesies. These let you diversify across a group of investments, whether it’s by sector, theme, geography, or asset class. Some technology-focused ETFs available on the ASX hold popular global technology companies such as: Afterpay, Xero, Seek, Upstart, Alibaba.

Another option is checking out some of the ASX listed Investment companies (LICs) that focus on technology investments and SPACs, many of which are US based.

The risks of investing in a unicorn

There can be lots of hype associated with tech unicorns, whether they’ve earned it or not. This sometimes causes many to jump on the bandwagon due to FOMO (fear of missing out) and to abandon the usual risk analysis.

Some commentators argue strongly that prices are often inflated, and the real value is not apparent. The value of unicorns is generally based on how investors and venture capitalists feel they will grow and develop, which is all about long-term forecasting and may have nothing to do with how they perform financially. Often, generating a profit is a long way off.

Another thing to consider is that fast-growth companies can be unpredictable and affected by things such as changing regulation and government policies, or even personal relationships and changing internal structures. These factors can impact strategy, offering, financials and a company share price among many other things.

What to consider when choosing to invest in a unicorn

Like any investment, it’s essential you do your homework or due diligence beforehand. Ideally, the companies you invest in align with your risk tolerance, time horizon, and personal values and goals.

Questions to consider include: how does this fit with my long-term investment strategy? This is a good way to see if you’re being swayed by emotion or your friends’ investment moves without assessing whether it’s right for you.

How to find a unicorn

Getting information about privately held companies takes some sleuthing because they don’t have the same reporting requirements as a company listed on an exchange. Your own social or industry networks, venture capitalist circles, business media, and research companies such as Tracxn are places to start.

Unless you’re an established private investor or venture capitalist, unicorn companies don’t typically accept smaller investments. What you can do is track the growth of up-and-coming companies in the event they do decide to become publicly listed.

Australia has lots of talented start-ups in the realm of soonicorn (on the way to a hundred million valuation) and minicorns (early stage growth ventures). However it can be difficult to pick and gain access to the winners with the right team, connections and experience.

Unicorns might be beautiful (and more plentiful) but they still remain elusive.

This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.

Brendan Doggett

Country Manager, Sharesies Australia

Brendan Doggett is the country manager of Sharesies Australia. Prior to joining Sharesies, Brendan worked across companies in the financial services industry in Australia including Macquarie Group, Citi bank, BT and Westpac Group. He holds a Bachelor's degree in Business/Commerce.