When To Invest In Unicorns

Another day, another Unicorn…

I just ran across the latest member of the Unicorn club yesterday. It’s a food delivery startup from China called Ele.me. Translated from Chinese, it means “Hungry.”

It just raised $630 million at a valuation of $3 billion. (Remember, a Unicorn is any startup valuated at $1 billion or more.)

Unicorns now number 132. In late 2013 they totaled 39!

Some Unicorns are overpriced. But is this news? Every market has its complement of companies that are overpriced and underpriced.

Unicorns are no exceptions.

But investing in one is usually a smart move.

In fact, my co-founder Adam Sharp just gave a great presentation on “How to Bag a Unicorn” at the first Startup Investor annual conference we hosted last week in San Francisco.

Today, I’d like to address not the “how,” but the “when.”

Because when it’s not a smart move, the reason is usually timing.

Not All Unicorn Investments Are Created Equal

“All you need is one big winner – a Unicorn – to make serious money.”

I’ve heard this plenty of times.

It may be true, but it’s not the whole story.

The dirty little secret about a Unicorn is that it’s not the great investment it’s cracked up to be – at least not for venture capital firms. The numbers are revealing…

From 2004 to 2014, 62 startups had initial public offerings or were bought out, all for $1 billion or more, says NAV.VC (a venture capital firm specializing in seed-stage investing).

Seventy-four venture capital funds made 339 Unicorn investments. So, many of these VC companies invested in the same Unicorn more than once.

Almost all of them made the VCs money. But here’s the thing…

Only a few were difference makers.

The math behind early-stage and late-stage investing tells you why.

To get an 8X to 10X gain as a seed-stage investor, your $10 million company would have to exceed a valuation of $100 million.