So my first reaction was that this is just a vanity metric.
However, in the public cash equity markets there is an actual benefit to having a "large" market cap.
note: Here I'll use market cap for public companies and valuation for private companies as measuring roughly the same thing even though they have some differences.
One of the greatest tail winds a stock can have is to be in a popular index, this means that ETF's will be a forced buyer of their stock.
Most indexes have a market cap component and the amount of money tracking large cap indexs dwarfs the amount in small cap indexs so a larger valuation is obviously useful.
It can also help public companies borrow as debt to equity is a ratio that most people consider when choosing to loan( buy bonds) from a company so again market cap matters.
It also helps a public company pay its employee's in restricted shares as these can be cashed out immediately by employees for actual money as the shares come off restriction so again a growing market cap has the benefit of giving employee's raises without any money leaving the company.
Microsoft used this better than anyone during the 80's and 90's.
It's less clear to me why a valuation of over $1B matters to a private company though.
Even stock options don't really seem to matter as a reason for wanting a larger valuation as typically employee's can't immediately convert options to cash. In that case only the IPO price(hence public valuation would matter).
Is there any reason other than signalling that this company belongs with the likes of Uber and Airbnb?
EDIT agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.
I agree with all the key points you have listed, I just wanted to add that a unicorn became a status symbol that can impact a variety of things:
* A supplier to the unicorn may perceive the company as a future star, which makes them decide to provide goods & services at a discounted price with the intention of having their business for multiple years with potential for new business areas
* A future employee can perceive the company as "the next big thing" and decide to work there in part, because of their status symbol
* The medium-large investors may mentally perceive the company as a 'sure bet'.
* Small investors may perceive the company as "one of the ones that the big investment guns have approved off"
* Future & current customers may perceive them as a successful company
* The 'unicorn' name is catchy, increasing the brand value
All in all, 'unicorns' is just a measurement stick. In theory a $990M can be just as successful as the $1B in the medium-long run, however, the perceived view from humans (yes, all of us), can have a material impact on the business
> In theory a $990M can be just as successful as the $1B
I'm willing to bet there are gaps in valuation distributions such that a $1B valuation is statistically more likely than a $900M valuation. I think by the time the valuation is that high you might as well throw in an extra ~10% valuation to get yourself the extra marketing of investing in a unicorn.
Great points, I think I agree on all of them. Cynically speaking, I think the answer is just that it's a round psychological number -- the three comma club. It's a rough binary signal that indicates growth and clout to a layman, and works reasonably well as a proxy therein, even if it's pretty noisy. I've personally noticed that working at unicorn companies has done a lot more for my career and network than non-unicorn companies, and it's done the same for lots of folks I worked with there, even those who weren't on as high profile projects as me and who felt like they didn't grow as much.
> It's less clear to me why a valuation of over $1B matters to a private company though.
> hence public valuation would matter
There is your answer. IPO valuations have to come from somewhere, and the most recent private valuation is usually a good starting point for what investors will pay.
I'm reasonably certain that the starting point for public valuations is not the most recent private valuations. These deals are typically centered around public valuation comps (i.e. other similar companies) based off of revenues/EBITDA/etc.
Couldn't the valuation be based around both most recent private valuation, and comparatively <usefulAdjective> public companies? The bankers basically just make it up, anyway. Their goal is to just pick a number as close to what they think the market will settle on as possible. The "market" includes previous investors in the company, and also public investors of similar companies. So it makes sense the bankers would consider both markets when pricing the stock.
If you sell a car, you set the price by considering how much you paid for it and how much people are paying for similar cars. End of bad analogy.
People are more likely to work for a unicorn because then they can put that on their resume. It also means the startup probably won't fold anytime soon, because too many people have a stake in its success at that valuation.
> agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.
Brand value / free marketing. Hitting the 1B threshold unlocks a lot of publicity that 990 million doesn’t. The buzz that it generates aids both sales and recruiting efforts.
chatmasta already mentioned IPOs, so I'll just add that private companies can also often be acquisition targets.
Anything that helps anchor the price for a bid is helpful, so you'll always want to point to a number that's as high as possible. You will also want to call out which series of funding that number comes from, and hopefully those two things go hand in hand.
However, in the public cash equity markets there is an actual benefit to having a "large" market cap.
note: Here I'll use market cap for public companies and valuation for private companies as measuring roughly the same thing even though they have some differences.
One of the greatest tail winds a stock can have is to be in a popular index, this means that ETF's will be a forced buyer of their stock.
Most indexes have a market cap component and the amount of money tracking large cap indexs dwarfs the amount in small cap indexs so a larger valuation is obviously useful.
It can also help public companies borrow as debt to equity is a ratio that most people consider when choosing to loan( buy bonds) from a company so again market cap matters.
It also helps a public company pay its employee's in restricted shares as these can be cashed out immediately by employees for actual money as the shares come off restriction so again a growing market cap has the benefit of giving employee's raises without any money leaving the company.
Microsoft used this better than anyone during the 80's and 90's.
It's less clear to me why a valuation of over $1B matters to a private company though.
Even stock options don't really seem to matter as a reason for wanting a larger valuation as typically employee's can't immediately convert options to cash. In that case only the IPO price(hence public valuation would matter).
Is there any reason other than signalling that this company belongs with the likes of Uber and Airbnb?
EDIT agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.