The only thing mythical about unicorns these days is their valuation

They used to be the billion-dollar startups. Now, we call them unicorns, a term coined six years ago by Aileen Lee of Silicon Valley-based Cowboy Ventures. In mythology, unicorns are rare, beautiful creatures. It was the perfect name – until recently.

The term unicorn is taking on a new meaning: startups that perpetuate the myth that they are worth a billion US dollars.

These days, it does not take much money to claim a US$1 billion valuation – under US$200 million in some cases. One doesn’t also have to be a leading edge or disruptive tech company. Many unicorns, especially those in China, are simply smartphone apps applied to businesses that have been around for decades.

The 2017 China Unicorn Enterprise Development Report lists 164 Chinese unicorns worth a combined US$628 billion, compared to 132 in the US valued at more than US$700 billion.

Who determines the value of a unicorn? Turns out, it is the investors themselves.

Online Chinese brokerage Tiger Brokers, backed by Wall Street guru Jim Rogers, said investors putting in US$80 million of series C funding in July 2018 determined a valuation of US$1.06 billion. That is despite a global equities slowdown, with Hong Kong stocks hitting a 10-month low some time in August 2018 and mainland Chinese market turnover at a four-year low. A Tiger spokesman did not immediately reply to a question on this matter.

A study of 135 US unicorns in 2017 found that on average, they were 48% above fair value. Nearly half should have been valued at less than US$1 billion, and 13 were more than 100% above, according to researchers at Stanford University and the University of British Columbia.

One of the reasons cited for the overvaluations were the strings that investors attach to their money. IPO return guarantees were offered to investors by 15% of the US unicorns and seniority over all other investors were given to one-third of them.

There does not appear to be much, if any, research on “fair” valuations of Chinese unicorns, but venture capitalists generally agree that valuations in China are a lot higher than their US counterparts. This is usually justified by China’s faster growth rates and a population of 1.4 billion people – although only 55% have internet access. With data touted as the “new oil,” Chinese unicorns also pitch themselves as valuable sources of consumer spending patterns, though in the long term people may be less willing to trade their personal data for free or subsidized products.

Delivery men pick up Luckin orders. / Photo credit: Luckin

The “huge market” advantage argument does not hold up in some cases. Luckin Coffee, a Chinese cafe chain that promises door-to-door deliveries within 20 minutes, claimed unicorn status after a US$200 million investment round in August 2018, yet on average, mainland Chinese only drink 4.5 cups of coffee per annum versus 269 for US consumers.

Luckin Coffee said its valuation was mutually agreed to by the company and its investors. “We can prove its soundness with future performance,” a company spokeswoman said in response to an inquiry.

One group of unicorns that leveraged the billion-plus population to gain funding were the dockless bike-sharing companies.

Dozens sprang up two years ago, but after burning through billions of dollars, what’s left is the wreckage (literally) of hundreds of thousands of bikes thrown into rivers and abandoned on streets – as well as three players that account for more than 90% the market. (To see where a large part of that money ended up, check out these aerial photographs of the “bicycle graveyards” in China, published in SCMP‘s Post Magazine.)