Return to search

Venture firm study pinpoints top unicorns

Scale-Up VC publishes a research report called "Investing in Unicorns in 2020" that analyzes the ideal time to back a unicorn.

In this age of the unicorn, not all venture-backed companies valued at over a billion dollars are equal.

That’s according to the Palo Alto venture firm Scale-Up Venture Capital, which researched more than 500 unicorns to determine which ones offer the best return potential.

Among the conclusions, the report found that the unicorns that can deliver an optimal return on investment are those that had a post-money valuation between $2 billion and $5 billion at the time when they were funded and entered unicorn status.

Though there are plenty of unicorns in China and a growing number in Europe, the report’s conclusions primarily are more consistent with Silicon Valley-based unicorns and those outside the healthcare sector, said Alex Lazovsky, a founding partner of Start-Up VC.

Lazovsky told Venture Capital Journal that the firm conducted the analysis based on data for 530 unicorns culled from Crunchbase, PitchBook and other public data to look at rounds, investors and exits.

In looking at acquisitions and IPOs of unicorns over the last several years since the term unicorn was coined, Lazovsky said the average exit is about $10 billion. “if you invest in a $5 billion unicorn, the return could only be 2x or less,” he said.

His point is that only about half of the unicorns at any stage will make it to the next billion-dollar valuation, but the sweet spot for balancing a high potential return and the best chance of achieving that is when a unicorn company is valued between $2 billion and $5 billion.

Among the other findings, the report found that for investors, the challenge is shifting away from finding a potential unicorn at the seed stage to backing the few existing unicorns with growth potential of 400 percent or more.

The report also discusses the unicorn boom in China and how those billion-dollar companies face different challenges than their US counterparts in part because of regulatory risks and the apprehension of founders.

Lazovsky also said that the potential for direct-to-consumer companies is huge once they become a unicorn, but he said consumer-facing companies are harder to grow in comparison to enterprise unicorns.

The firm’s study is available on its website, and Lazovsky said he wanted to share the info and welcomes counter-arguments.

This is the first time the firm conducted the study, which Lazovsky said was done to better understand the unicorn market. “When a company joins the unicorn club, it generates a lot of buzz and attracts more investors,” Lazovsky said. “But some of those companies don’t have enough revenue, or the multiples are low or the business model doesn’t add up.”

Scale-Up VC has about 10 companies in its portfolio. The firm invests in mid-stage to later companies, generally with at least $10 million in revenue. Lazovsky said the firm’s team has backed unicorns in past, including Slack and Snap.