Can a Startup Become a Unicorn Company with an IPO?

The notion of a unicorn company has evolved significantly over the years and is often associated with privately held startups that have a valuation exceeding $1 billion. However, the definition of a unicorn can sometimes be ambiguous, especially when a startup transitions from the private to the public market through an Initial Public Offering (IPO). In this article, we will explore the intricacies of unicorn companies, the impact of an IPO, and the ongoing debate surrounding the term.

The Definition of a Unicorn and the IPO Transition

A unicorn is typically defined as a privately held startup with a valuation of over $1 billion. This term was popularized by venture capitalists to highlight the exceptional growth and valuation of startups. The term provides a clear benchmark for assessing the success and potential of these companies but can be challenging to apply when a startup decides to go public through an IPO (Initial Public Offering).

After an IPO, a company's valuation is no longer a private matter; it is subject to the dynamics of the stock market, investor sentiment, and market conditions. As a result, the valuation of a company post-IPO may fluctuate, reducing the likelihood of it retaining the unicorn status. It is important to note that this transition does not diminish the significance of the company's achievement in the startup ecosystem but merely reflects the changes in its stage of development and structure.

Characteristics of a Unicorn Startup

The characteristics that define a unicorn startup can be summarized as follows:

Unproven Business Model: A startup is often at an early stage, with an undefined or untested business model. Success and growth depend on the team's ability to validate and scale the model. New or Uncertain Market: The products or services offered by the startup are either new to the market or operating in an uncertain and rapidly evolving landscape. Negative Cash Flow: Most startups require external financing to sustain operations while they are still unprofitable. These companies anticipate continued negative cash flow, depending on future funding to continue operations. Uncertain Timeline to Profitability: The path to profitability is uncertain, and achieving it depends on various factors such as market acceptance, product development, and competitive dynamics. Uncertain Sustainable Competitive Advantage: Startups often lack a sustainable competitive advantage, making it challenging to maintain their position in the market long-term.

These characteristics are often highlighted in IPO filings as risk factors that investors need to carefully consider before making an investment.

The Controversy: Is a Unicorn Still a Unicorn After an IPO?

There is a debate within the startup community about whether a company can still be considered a unicorn after it goes public. In one perspective, a unicorn is simply a highly valued startup that remains private. This definition aligns with the original intention behind the term but may overlook the significance of the IPO process.

Another perspective is that a unicorn should retain its status regardless of whether the company is private or public. This viewpoint emphasizes the substantial achievement of achieving a valuation of over $1 billion, regardless of the company's market status. This view is supported by experts like Skip Sanzeri, who argues that the unicorn status is earned and should not be taken away once the company goes public.

The Future of Unicorn Companies

Regardless of the debate, the journey of a startup to become a unicorn and then potentially go public is a complex and often dynamic process. As companies evolve, they may face new challenges and opportunities that necessitate different strategies and approaches to maintaining their unicorn status or achieving even greater success.

Conclusion and Further Reading

The term unicorn provides a meaningful benchmark for the success and valuation of startups. However, the debate over whether a company retains its unicorn status after an IPO is a reflection of the evolving nature of the startup ecosystem. For businesses interested in navigating this landscape, it is essential to understand the characteristics and challenges of unicorn startups and the implications of an IPO.

For further exploration of this topic, you may find these resources helpful:

The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings How to Transform a Startup Into a Unicorn Understanding the Basics of an IPO