Your Billion-Dollar idea: Bootstrap or Unicorn?

Simply put, a unicorn company is privately owned startup which is valued at over $1billion.



For those unfamiliar with the language of the business, these phrases may sound quite strange. In this article, the meaning of these terms would be broken down in simpler terms and the relationship between them would be exposed.

Unicorn Companies

Simply put, a unicorn company is privately owned startup which is valued at over $1billion. The term ‘unicorn company’ was coined in 2013 by Aileen Lee, the founder of CowboyVC in her article titled “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups”. In this article, she estimated that less than 1% of startups across the globe ever made it to the $1billion, comparing the rarity of these kinds of businesses to that of a unicorn.

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There are only 3 criteria for a business to be referred to as a unicorn: it must be privately owned, it must be a startup and it must be valued above $1billion. Despite the name, unicorn companies are not as rare as one may think, considering that at present, there are about 450 unicorn companies (https://www.cbinsights.com/research-unicorn-companies) in the world.

The valuation of a startup is largely by forecasting. Investors and venture capitalists observe the market potentials of startups to determine how well these startups will do in the business world and whether the returns will be worth the investments. The capital that these investors offer for a percentage of the equity then becomes the final valuation of the startup.

There are many different types of unicorn companies. Decacorns are unicorn companies valued at over $10billion. Some popular examples of decacorns include Go-Jek, Grab, Epic Games (Fortnite), etc. Super unicorns are companies valued at over $100billion. The only clear super unicorn are Google and Facebook.

Important fact: Unicorn companies only exist in 24 countries of the world. In 2018, China overtook the US in the number of unicorns, topping the list with 206 unicorn companies, while the United States has 203 unicorn companies. India comes 3rd place with only 21 unicorns while the rest are shared by the remaining countries.

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Bootstrapped companies

Bootstrapping, in business terms, refers to building a company from scratch, without any outside funds. A bootstrapped company is one which is entirely powered by the entrepreneurs personal funds, and in some cases, the cash flow from its initial sales.

Bootstrapping may sound like a romantic idea, but it is a lot of hardwork. Bootstrapped companies do not have access to a flow of cash like other companies with investors and as such, the must minimize spending while maximizing profit. One important factor to the success of a bootstrapped company is that the profits from the business are pumped back in as capital to keep things moving.

Despite how difficult it sounds to bootstrap a company, these kinds of companies are quite common, and among them there are immensely successful ones such as eBay, Oracle and Microsoft. This is because the benefits of bootstrapping are significant enough to take the risk.

Bootstrapping gives an entrepreneur total control over the workings of his business, without external and sometimes unwanted input from investors and venture capitalists. Due to this, a bootstrapped company can focus more on customer satisfaction and experience, without wasting any time on drawing up investment pitches.

Also, a bootstrapped company does not have easy access to funds and as such, the entrepreneur must determine the most profitable ways to spend the limited funds. This teaches calculated risk taking and frugality, which will be beneficial in the long run after the business is established. At this stage, even though the flow of cash may be more accessible, the entrepreneur will still keep to the strategies that brought the company to where it is.

Bootstrapping creates better businessmen and businesswomen. An entrepreneur who chooses to bootstrap his business must learn the workings of every part of the company. Because there may not be enough funds to hire the manpower needed for certain roles, the entrepreneur must stand in and fulfill these functions. Bootstrapping teaches an entrepreneur important skills such as networking, marketing, hiring, saving, attracting and keeping customers, working under pressure, among many others.

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The Relationship

The idea of bootstrapped companies and unicorn companies are by no means mutually exclusive, but then neither are they mutually inclusive. It is not very common to find bootstrapped startups that make it to the list of unicorn companies. However, this does not mean that there are absolutely no companies which were both bootstrapped and unicorns at the same time. Examples of companies like this include MailChimp, Shutterstock, GoPro, Mojang (Minecraft), Shopify and so many more.

At this point, you may be wondering, “I have an idea which can easily be worth a billion dollars. Do I bootstrap? Or do I seek a valuation and become a unicorn?” Many suggest that it is important for an entrepreneur to bootstrap a business to a certain point before pitching to investors and VCs. However, the answer lies in the entrepreneur. Bootstrapping only works when an entrepreneur is willing to put in the hardwork and long hours needed to make an idea into a profitable venture. As has already been shown, a billion-dollar venture, whether bootstrapped or not, is a unicorn. It then becomes a question of whether you would like to solely own all the profits, or share them with investors.


References

AsiaTechDaily. (2019, July 10). Bootstrapping Success Stories - The Unconventional Route. Retrieved from https://asiatechdaily.com/bootstrapping-success-stories/
Campbell, A. (2018, May 22). What is Bootstrapping? Small Business Trends. Retrieved from https://smallbiztrends.com/2013/11/what-is-bootstrapping.html
CB Insights. (n.d.). The Complete List of Unicorn Companies. Retrieved from https://www.cbinsights.com/research-unicorn-companies
Chen, J. (2020, January 29). Unicorn. Investopedia. Retrieved from https://www.investopedia.com/terms/u/unicorn.asp
Flaherty, J. (2017, July 1). Invisible unicorns: 35 big companies that started with little or no money. TechCrunch. Retrieved from https://techcrunch.com/2017/07/01/invisible-unicorns-35-big-companies-that-started-with-little-or-no-money/
Kenton, W. (2020, January 29). Bootstrapping. Investopedia. Retrieved from https://www.investopedia.com/terms/b/bootstrap.asp
Pahwa, A. (2019, May 24). What Is A Unicorn Startup Company? Feedough. Retrieved from https://www.feedough.com/what-is-a-unicorn-startup-company/