What happens when tech unicorns stop being rare and mythical?

How do you define success in the business world? Traditionally, it’s done by taking a cold hard look at how much revenue a company is generating and, more importantly, what its profits are.

More recently, other factors, including harder-to-measure metrics such as “social impact”, have also been considered.

In the tech space though, they do things differently. The focus is often on valuation instead. This is largely because technology companies can operate for years without turning a profit. Indeed, some never do.

Many start-ups build a product or service for which there is demand, but they have yet to figure out how to monetise. Investors taking a punt on those companies do so in the hope that things will eventually turn good.

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Merit

This approach isn't without merit. It wasn't that long ago when analysts were pondering how leading born-on-the-internet companies such as Amazon and Facebook would ever go beyond the hype and actually make some real money for their backers.

In recent years, a company hitting “unicorn” status has tended to serve as a signpost that a company is on the right track. While it’s not a cast-iron guarantee, the general thinking seems to be that if investors are willing to put so much money into a particular start-up, then it must be good.

As we have seen recently with the likes of WeWork, which at one stage was worth a whopping $47 billion (€40 billion), or Theranos, which hit a $9 billion (€7.6 billion) valuation before things started to unravel, this is by no means a foolproof investment strategy.

With so much venture capital money sloshing around of late, there is no doubt that valuations for start-ups are being inflated. Some analysts are starting to ask if we need to reconsider how we measure success in the tech space.

When Cowboy Ventures founder Aileen Lee first came up with the term "unicorns" in 2013, she was referring to US-based software companies that were less than 10 years old and valued at $1 billion (€850 million).

At that time, there were just 39 of them. The term was meant to convey just how rare and mythical it seemed that a start-up could reach such a valuation.

Journalists Dan Primack and Erin Griffin widened the definition in a Forbes article two years later to refer to any privately-held start-up that hit the $1 billion milestone. With that the accepted number of unicorns rose to 80.

Value

Now though there are more than 800 unicorn tech companies with a combined value of $2.6 trillion (€2.2 trillion). Unicorns, it seems, are no longer rare or mythical.

Writing on Axios last week, Primack argued that given the large number of them, it is time to ditch unicorns in favour of “dragons”. These are companies that are valued at $12 billion (€10 billion) or more, net of venture funding. The journalist admits that this is a somewhat arbitrary figure but he says it is one that more accurately reflects growth in valuations.

Suggesting unicorns are no longer cool, he writes: “there’s been a flurry of startups whose valuations have been inflated by investment dollars. Isn’t it more impressive to be worth $500 million on $50 million of venture capital than $1 billion on $500 million of venture capital?

“Dragons are much bigger, stronger and more awe-inspiring than unicorns. They destroy whatever’s in their path, and their own destruction is viewed as catastrophic (at least if Game of Thrones is any guide),” he adds.

Only 19 companies globally are dragons currently. Stripe, the payments company founded by Patrick and John Collison, is one. Others include Elon Musk's SpaceX and TikTok owner ByteDance, Instacart and Revolut.

The dragon argument doesn’t really affect Irish companies as there are only a handful of unicorns here at present. Intercom, Workhuman and Fenergo have all hit the milestone and there is suspicion a few more companies here may also have done so, but remain coy about discussing their finances.

With multi-million dollar funding rounds being announced by the second however, there are questions as to whether they are newsworthy any more. Even locally, we’ve moved on from a time where it was seen as hugely significant if an Irish-founded company raised, say $20 million (€17 million).

Focus

Over the past year, the likes of Workvivo, Teamwork and Flipdish have all secured sums worth many multiples of that.

As a result, many readers may simply shrug their shoulders when they see reports of companies raising funds at seed or Series A stages, which may be still relevant even if the sums involved aren’t nearly as impressive.

Focus is likely to shift to other factors in measuring success, not least traditional metrics. Start-ups may be wary of revealing all about how they are doing financially, particularly if they are still pre-revenue, but that’s not necessarily the smartest path for those wanting to get publicity.

"A tip to any startups looking to get some coverage: SHOW US YOUR FINANCIALS," tweeted Ryan Browne, a tech journalist with CNBC recently.

He’s right. For any start-up looking to make a noise, it’s time to open up your books and reveal all.