The magic of “unicorns”

The famous "unicorns" are companies that start as a dream and a very small budget. But which magically – or seemingly so – end up breaking the billion-dollar barrier. Completely focused on innovating these are almost 100% customer-centric ventures. They are undoubtedly the new "crown jewel" of the economy.

15 October 2021

Less than two months ago, NotCo, a company that Jeff Bezos – founder of Amazon – believed in, managed to surpass the billion-dollar barrier and become a unicorn. This is not a minor milestone, and there are several other companies that are hot on NotCo’s heels that could also become the magical animals that the Chilean economy is yearning for. So, how does one manage to become a magical animal in the billion-dollar jungle? Read on to find out!

What are unicorn companies? They are billion-dollar startups that take advantage of new technologies to innovate and market their services to customers. Their growth is exponential, and they seem to be truly unstoppable. Most of them are less than [not even] 10 years old.

  • This concept was first coined by Aileen Lee, founder of Cowboy Ventures. She conducted a study to analyze different companies founded between 2003 and 2013, and then published an article explaining this phenomenon, which she termed the “Unicorn Club.”
  • Lee’s list was led by Facebook, LinkedIn and Twitter. Facebook was the jewel and the first company to be considered the super-Unicorn of the decade, having attained a US$ 260 billion valuation at the time.
  • The unicorns have had a significant impact on the market and society. They have managed to revolutionize economies and ways of consumption. These companies are often considered to be incredibly amazing, almost fantastical, hence their name which refers to the mythological Unicorn.
  • But it’s not that straightforward; to be considered a unicorn, the company’s value must derive from private capital, and they must not be traded on a stock exchange. Once these companies go public, they are no longer considered to be unicorns.
  • In the last two years their numbers have grown from 200 to more than 400. According to a recent CB Insights report, as of June 2020 there were 478 unicorn companies in the world. Together they were worth US$ 1,416 billion.

What features do they share? The types of businesses that qualify for unicorn status are e-commerce, fintech (technology companies that create novel financial solutions and products), internet software, service companies, and healthcare industry linked ventures. And why? Because they are companies that have found ways to take advantage of the needs created by new technologies. Basically, they saw an opportunity and began to match, even outperform, their competitors, who continued to operate – and many still do – in a more traditional manner.

  • Most unicorns have sprung up in the era of social networks and have used them as tools to consolidate their position. And this is the case not only for the operations themselves, but also for their founders, who usually are entrepreneurs whose average age is 34. Unicorn companies are characterized by the fact that though initially not heavily funded they still manage to quickly gain an international presence with a successful global expansion.
  • These are usually start-up businesses that are risky, because if the investments don’t come through, the project may be lost. However, the industry believes that this is exactly what makes these types of companies so appealing.
  • The main tools these companies use to achieve quick success are social networks and technology. These companies rely on applications for electronic devices or social media. Thus, they attain a massive and at the same time precise reach, as the data they gather allows them to successfully segment their market. This brings them closer to their target audience and facilitates the company’s growth.
  • Another key factor is their so-called “consumer-centered” strategy. This means that the customer experience is always of paramount importance and hence everything is focused on service and user comfort.

World rankings. There are five U.S. companies and four Chinese companies at the top of the 2020 unicorn rankings. This reflects which countries are having most success in the world.

  • They are simple startups at the outset and end up becoming very large high-impact companies such as Uber, Airbnb and Xiaomi. These companies are great examples of how quickly growth happens.
  • They also make contact with their end customers easier by enabling direct channels that allow users to connect with the company without having to rely on intermediaries.
  • Some of the companies in the 2020 ranking are Bytedance (China), Didi, Chuxing (China), JUUL Labs (United States), Stripe (United States), Airbnb (United States), SpaceX (United States), Kuaishou (China), Paytm (India), Epic Games (United States), DJI Innovations (China).

How is Latin America doing? These “magical animals” have also appeared in the region with businesses that have managed to break the barrier. One company that has done so is Mercado Libre, the leading e-commerce technology company in the Latin American region. Founded in 1999 by the Argentine Marcos Galperín, it offers solutions so that individuals and companies can buy, sell, advertise, send and pay for goods and services over the Internet.

  • Another example is Rappi, which puts the consumer in touch with all types of products and services, from supermarket shopping and restaurant take-out to making an express purchase of a specific item. Founded in Colombia in 2015, it is now worth US$3.5 billion.

How are things at home? Chile’s entrepreneurial and innovation ecosystem is one of the most active in Latin America. CORFO and Start-up Chile have supported more than 2,000 companies in the last 10 years. While these numbers are quite encouraging, we are still lacking in one very important area: unicorn creation.

  • However, Cornershop recently realized its grand dream when it was absorbed by Uber for US$ 459 million. Following its acquisition, the company was valued at US$3 billion, thus becoming Chile’s first “magical animal.”
  • Having the first company of this type is no small feat, and it opens up financing opportunities for other ventures to follow along the same path. In this context, there are now also centaur companies (valuation over US$ 100 million) that have spawned great expectations.
  • Below is a ranking of the three companies closest to becoming the next unicorn based on their use of technology and founding date.
  • -Betterfly. A startup founded in 2018 that developed a platform to promote and reward healthy habits for its users. The company has raised US$ 60 million in its third round of financing, surpassing companies like NotCo or Cornershop at the same stage. Betterfly is backed by organizations such as JP Morgan, Alaya Capital, Endeavor, Bio Ritmo and Grupo Prisma, among others.
  • -Fintual. Founded in 2016, this startup seeks to use techonology to make the investment process easier for people and companies. Although it began as a Fintech (Finance & Technology), today it is more closely linked with mutual funds. To date, it has raised more than US$ 1 million in venture capital. 
  • -Poliglota. Envisioned as the first Chilean unicorn in the educational technology sector, this startup has more than 12,000 students and a presence in Chile, Peru, Mexico, Colombia and Nicaragua.

How is a unicorn company valued? As Max Errázuriz explained to the Diario Financiero (DF), “the methodology is based on a company’s Gross Merchandising Value, which provides an estimate of its future cash flow capacity, although there are cases of startups with good growth potential where other methods and factors must be applied to arrive at the valuation.”

  • Valoriza has been determining the value of different size companies in Chile since 2013, whether they are startups, scaleups (companies that grow at rates of 20% annually), large companies or unicorns. They valued Cornershop in 2019, prior to its negotiations with Walmart. Over the years they have delivered a standard valuation of more than 300 local firms, of which 100 were startups.
  • Max Errázuriz, the company’s general manager emphasized to DFthe first thing to understand is that the value of a company is given by its capacity to generate cash in the future, that is, what is left of the profit after financing all its working capital needs and having made all the necessary investments to ensure its growth. 
  • Errázuriz explains that once the valuation of the company is concluded, there are three further factors that explain how a startup can be worth more than US$ 1 billion and become a unicorn.
  1. The companies must have real and tangible sales. This criterion is applied to firms that have significant sales, which gives them a very high potential for growth and scalability, without the need for a large investment. The best-known example of this is Cornershop – currently valued at over US$ 3 billion – which had very high sales that allowed it to scale first and then be acquired by Uber and achieve unicorn status.
  2. Startups with a large number of customers and users that engage with it. According to Errázuriz, the clearest example of this is WhatsApp.
  3. Companies that obtain successive rounds of capital raises. This is the factor behind NotCo’s success – valued at US$ 1.5 billion – and is the model that Betterfly – estimated to be worth US$ 300 million – is following to reach the US$ 1 billion goal, as repeated rounds of capital raising directly increase the company’s value.

The NotCo case. On July 26 of this year, following a new round of funding that included investments from sports stars such as Roger Federer and Lewis Hamilton, NotCo became a “magical animal.”

  • After five years, NotCo’s valuation rose to US$1.5 billion. And now this plant-based food brand has surpassed the value of Entel (US$1.43 billion) and AES Gener (US$1.63 billion).
  • The company was founded in 2016 by commercial engineers Matías Muchnick and Pablo Zamora, together with researcher Karim Pichara, with the aim of reinventing the food industry by creating plant-based alternatives.
  • Currently NotCo, the star of the local unicorns, makes plant-based mayonnaise, milk, ice cream and hamburgers and is the superstar of Chilean startups. The company’s greatest asset is not its products but rather Giuseppe, the algorithm they use to develop them.