February 8, 2023
How Startups Become Unicorns (BLUEPRINT)

Many new businesses are founded yearly, but most fail before they reach their first anniversary. It takes more than a business plan to start and run a business. For a business to thrive, it requires a perfect storm of creativity, hard work, and a lot of patience. 

Every entrepreneur dreams of seeing their business ideas become a reality and grow to unicorn status.

However, achieving unicorn status for a startup is merely a pipe dream. The chances of a startup becoming a unicorn are only 0.00006%. This is not to say it is impossible. 

Startups are young businesses founded to create a one-of-a-kind product or service and bring it to market to solve a problem or meet demand.

Despite the fact they are new businesses, they have the potential to become unicorn startups. Normally, startups take an average of seven years to become unicorns.

What is a unicorn startup?

A unicorn startup is defined in the venture capital industry as any company that has been in operation for less than ten years, is not publicly traded, has not been acquired by a third party, and has an investor valuation of $1 billion or more.

The name unicorn is derived from the mythical animal. For unicorn startups, it was coined by Aileen Lee, the founder of cowboy ventures. She used the term to emphasize the rarity of startups valued at 1 billion dollars without going public. 

In reality, only 3 out of every 5 million businesses have the potential to become unicorns.

Features of a unicorn startups

Given the rarity, you may be wondering what makes startups unicorns. There is no set formula for launching a successful unicorn startup. Several factors, including good fortune determine it. The unicorns are all different. Here are some standard features to look for to identify one.

i). Disruptive innovation.

Disruption is defined as an innovation in an industry that has a significant impact on how the industry or market operates.

In business, disruption is a good thing, especially for aspiring unicorns. Almost all unicorns have revolutionized their respective industries. For example, Airbnb has changed the way people plan their stay while traveling. Uber has also altered the way people commute.

ii). They often have a first-mover advantage.

Unicorns are mostly newcomers in their field. They usually introduce a one-of-a-kind product or service to the market.

Frequently, they alter people’s behavior to create a need for themselves gradually. They also tend to keep their first mover advantage by constantly innovating to expand their products and services.

However, to be a unicorn, a company does not have to be the first in its industry. Lift, for example, was founded three years after Uber. 

iv). They grow quickly. 

Unicorns are always growing. Investors can spot rising unicorns by looking at user acquisition and the potential market.

These unicorn companies grow by validating their marketing to sales channels through local testing and then quickly replicating the successful strategies in other locations.

iv). Unicorns are Tech-savvy

Growing businesses make use of available technologies and software to help them scale. Another feature shared by unicorns is that their business models are based on technology. Nearly 90% of unicorns offer software. Uber, for example, gained acceptance for its business model by developing a user-friendly app.

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v). They attract large-scale investment.

Unicorns are skilled at attracting investors and maintaining private equity without being publicly traded.

vi). Unicorns are consumer-oriented. 

More than 60% of unicorns have a business-to-consumer system. This means their business model is based on offering low costs goods and services to the everyday consumer.

Unicorns provide a compelling value proposition that can be used to boost sales and marketing efforts.

They incorporate tools to ensure that they develop products and services that are beneficial to consumers.

vii). Privately owned

A unicorn can only be a privately owned startup. The majority of unicorns are privately held, which raises their valuation when an established company invests in them.

Are unicorns worth it?

As a business owner, you may be wondering if unicorns are worth it. The truth is that, with a value of one billion dollars, they are usually regarded as very prestigious and valuable.

For many startups, becoming a unicorn is synonymous with success. 

Today, the number of startups that become unicorns is increasing. Obtaining unicorn status, however, does not imply success. Many unicorn startups struggle to maintain valuation, while others quickly deplete their investment. That doesn’t mean we shouldn’t be interested in unicorn startups. 

A true unicorn could be an excellent investment. Achieving the status of a unicorn startup is an accomplishment for any company. Also, if unicorns succeed, they could generate a massive return and thus contribute to the growth of the national economy.

How to become a unicorn startup?

Every year, a large number of startups are launched, but many fail before they reach their first anniversary. Growing to be unicorns is a process for those who thrive, not an overnight success.

To reach the unicorn level, your startup must go through the following stages:

#1. Have a great idea

Everything begins with an idea. To start a business, you must first have an original and feasible solution to an existing problem. The idea can come from anywhere, but it must be scalable and capable of being embodied in a product or service that solves a problem for your potential customers.

Once you’ve developed a viable idea, you’ll need to find a team to help you develop it. To build a successful startup, you need a strong team that can drive growth. It is critical to hire people with whom you share a common vision and goals. 

#2. Pre-seed funding and analysis

Founders want to get the project off the ground at this stage. Typically, the stage includes numerous analysis processes. These analyses include competitor analysis, target audience

 description, buyer persona creation, channel identification to promote a product, and a draft financial plan. 

There is no external source of capital during this initial funding phase. Typically, they fund through bootstrapping because the funds come from personal savings, friends, and family. In fact, at this stage, 77% of startups rely on personal savings.

Competitor analysis is necessary to identify opportunities and risks. It’s critical to be aware of what’s going on in the market and the broader industry when starting a business.

It is also necessary to define the target audience. These are the people who are likely to purchase your products and services. Understanding how and where to reach your ideal potential customers is critical.

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#3. Seed stage or funding stage.

During this stage, investments are required to build scalable business processes and identify a product or market fit. Founders must begin looking for seed funding at this stage. This is because the startup team already has a plan and set goals. 

The startup team will be required to demonstrate to investors the idea’s viability. There are numerous potential investors in a seed funding situation,  including founders, friends, family, incubators, venture capital firms, and others.

As a startup enters the growth stages, its funding requirements increase. It goes through a series of funding stages, A, B, C, and so on, until the startup’s valuation reaches $1 billion.

#4. Series A funding stage

This is the company’s first round of venture capital funding. It is an excellent opportunity for startups to expand across multiple markets. It is critical at this stage to have a plan in place that will generate long-term profits.

Furthermore, investors are looking for more than just great ideas at this stage. They are also looking for companies with great ideas and a solid strategy for turning those ideas into profitable businesses.

To ensure that you will attract good investment, follow the rule 30-10-2 rule. This rule states that you must find 30 investors willing to invest in your business. Ten of those thirty investors must be interested in your proposal, with two of them passing on funds to you. 

Series A investors may include venture capital firms, super investors, and business accelerators.

#5. Series B funding stage

Series B rounds are all about taking businesses beyond the development stage. At this stage, startups have demonstrated to their investors that they can achieve success on a larger scale. The series B funding stage enables startups to grow to meet their customers’ various demands while competing in competitive markets. 

Potential investors for series B include venture capitalists and late-stage VCs.

#6. Series C funding stage

Startups that reach the series C funding stage should be well established, on a growth path, have a strong customer base, stable revenue streams, and desire to expand their operations on a global scale. 

These startups seek additional funding to help them develop new products, enter new markets, and even acquire underperforming startups in the same industry.

At this stage, investors are delighted to discover successful startups because the startup is a no longer high-risk ventures. 

Series C investors include late-stage venture capitalists, private equity firms, hedge funds, and banks. 

#7. Series D funding stage and beyond.

This stage is not required by many startups. The funding series enables entrepreneurs to raise funds for unique situations. It also provides startups with the most viable solutions, allowing them to confront problems head-on by merging with another startup. 

Series D investors may include late-stage venture capitalists, private equity firms, hedge funds, and banks.

#8. Initial public offering (IPO)

The process of offering corporate shares to the general public for the first time is known as an IPO. A startup’s initial public offering is a sign of success. This process is frequently used by growing startups in need of funding to generate funds. Established organizations, on the other hand, use it to allow startup owners to exit some or all of their ownership by selling shares to the general public.

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When a company reaches a certain size, continued growth necessitates a significant injection of capital that is too large for even venture capitalists to contribute, it’s when an IPO is considered. 

How to seek funding to become a unicorn

We’ve talked about the stages that startups go through before becoming unicorns. As we’ve seen, they require a lot of funding to help them grow and stay at the top. 

However, persuading investors may be difficult. To secure funding, you must distinguish yourself from the hundreds of other startups seeking funding. You should be able to persuade investors that you’re not doomed to join the 90% of newly launched businesses that fail.

The practices outlined below will persuade potential investors that your startup is an unmissable opportunity.

01). Be completely transparent

Be as forthcoming as possible with your potential investors about the pertinent details and circumstances concerning your business. If they discover you have not given them full disclosure, they might withhold their investment. When trying to persuade investors, it can be tempting to provide every fact and figure available about your project. However, important details may be overlooked when you prioritize quantity over relevance. 

02). Create a feasible business plan

Investors place a high value on the business plan that you present to them.  They forecast their potential investment returns. Make sure you come up with a realistic business plan. Provide pertinent details in a concise, easy-to-understand format in your business plan. 

03). Highlight the uniqueness of your concept

Investors have probably seen a lot of pitches. You should not base your pitch on cheap gimmicks. Your focus should be on what makes your project unique. 

Explain in detail what distinguishes your idea from others, how will your company overcome its competitors? What does it offer that no other company in your industry does? Potential investors should be inspired to be a part of your project.

04). Have devoted co-founders

When you approach investors, you’re selling them on your team as much as your product or service. Rather than a single founder, investors frequently seek out talented co-founders. You must however select the appropriate team. They are an excellent way to supplement your skills and experience with anything you may be lacking. 

For example, you could be the genius behind an incredible new technology but lack business acumen. A business-savvy co-founder will increase the appeal of your project to investors. 

Conclusion

As we’ve seen, a startup will go through several stages before it succeeds. These stages enable startups to scale and stand out for potential investors to invest in them.

Even if a typical startup has a greater than 90% chance of failing, this is not a deterrent because even a 1% chance of success is enough to propel a startup to unicorn status.

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