What is a Unicorn?

Traditionally, Unicorn refers to a legendary creature that often depicted as a horse-like or goat-like animal with a single large, pointed, spiraling horn projecting from its forehead.

Later in the finance world, after coined by venture capitalist Aileen Lee in the year 2013, it then refers to a privately held startup company valued at over $1 billion. Unicorn was chosen to represent these companies because of its uniqueness and mythical which represent the statistical rarity of such successful ventures.

 

See also: Explaining Business Funding Stages

How to Value a Unicorn?

So how do the startup company come up with their value? How do you calculate the value of your business?

 

  1. Price to Earnings (P/E) Ratio
    P/E Ratio is the most commonly used formula to calculate the value of a company.

    Value = Net Profit x P/E Ratio

    However, because of different business nature, this valuation method may not be suitable for all company.

    Today, Tech startups mostly not making any profits at the beginning so this method will not work for them. Some companies, whose profits are cyclical or seasonal are not suitable to use this method also.

    Besides, some startups may use Price to Sales (P/S) Ratio to do their valuation because of their non-profitability in the beginning.

    Value = Revenue x P/S Ratio

    E-commerce titans like Amazon and JD.com used this method to do their valuation before.

     

  2. Comparison
    Compare to the listed companies with the same business nature/industry in the stock exchange with the consideration of liquidity discounts.
    Sometimes, a startup does not have a similarly listed company to be compared to, they can look for private companies, where their funding information is announced or reported in the media.For Internet startups, the comparison can be based on the number of active users, traffic, average revenue per user (ARPU) and etc.

    Crunchbase is the best platform to find funding information on private companies.

     

  3. Refer to the previous funding round
    Lastly, a startup can also value themselves by referring to the valuation in the previously completed funding round.

 

Some investors may use Discounted Cash Flow (DCF) method to value listed company, but for startups or private companies, this method is rarely used.


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