Every article I read these days in the tech media seems to tell me that if my startup Exam is not a unicorn, then I have failed, and if the share price of my company ever goes down, I should start shopping for a coffin.
According to the internet, on November 2, 2013, Aileen Lee first used the term “unicorn” to define companies valued at over $1 billion in this article on TC. Looking at Google Trends for “unicorn startup”, the term did not really take off until January 2015, so although it has become common in tech media, it has really been in use for less than 2 years.
When the term “unicorn” started to get old and stopped generating advertising revenue, it was closely followed by decacorn (10 billion) and hectacorn (100 billion).
The only way to find a value for something is to find someone willing to buy it.
Company valuation for public companies
Company market capitalisation is calculated by multiplying the number of outstanding shares by the value of each share.
For companies whose stock is traded on a public exchange, the valuation of the share is the price that shares last sold at. The more transactions that happen in a particular company’s shares, the more “liquid” the trading, the better the share price will reflect current perception of market value.
Even with very liquid companies, and regulations on reporting and insider trading, there are still occasions where people are surprised and prices crash.
Most people who buy and sell shares are aware that even the shares in large profitable companies will go up and down depending on the economy, and the latest quarterly results and forward projections. If a share price only goes up, it is time to call the regulators.
Company valuation for private companies
For private companies, the prices of share sales are not necessarily public, which makes it difficult to get an accurate valuation. The majority of share sales in private companies are private, so it is possible for companies to selectively disclose market price when it is beneficial for them to do so.
I suspect in many cases companies only report share sales or funding rounds where the price (and market capitalisation) has gone up, but keep quiet if the price goes down.
This has the effect of hyping the company and the valuation, and allowing for a more profitable exit for founders and investors, and could be considered a version of “pump and dump”.
The public can really only value private companies on the information those companies choose to disclose, so I do wonder how many of the companies out there that were unicorns in the past are still unicorns?
How to be Asia’s next unicorn
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