Introduction to venture capital and unicorns

What is a unicorn?

Although this term has actually existed for about 20 years, as far as I can remember, most people in the investment world did not pay attention to the term unicorn at least before the financial turmoil in 2008. However, in the past ten years, it has gradually occupied all the financial and economic pages, and it has become widely known with the help of Wall Street. Now anyone who cares about financial news almost knows that unicorns are companies with a valuation of more than one billion US dollars. But recently, a new term has appeared Decacorn, which means it is a company with a valuation of more than 10 billion US dollars.

Why unicorn matters?

In the past two decades, all the companies in the technology industry that you and I have known, including Alphabet (ticker:s: GOOGL and GOOG) and Facebook (ticker: META), have almost all evolved from unicorns. If there is no unicorn, there would not be a bunch of well-known listed technology companies now.

As long as unicorns do not go bankrupt and survive, they will be listed. Because early investors, without exception, would hope that the unicorns will be listed as soon as possible, so that they can exchange their investment profits for cash to cash out early, and then make the money that has been made several times or tens or hundreds of times (hundred times or more return is harder, but it’s not uncommon) to invest “more” on younger unicorns.

Why venture capital matters?

Venture capital is not a new term, it has existed for at least 20-30 years. However, after the 2008 financial tsunami, traditional banks or conventional loan channels are hardly the default financing channels for technology startups. There are many reasons, but I have at least the following points to share:

  • It is impossible for banks to lend money to companies that cannot provide collateral. Technology startups, especially software companies in a broad sense (most valuable technology companies fall into this category), the only asset is high-paid engineers (This is a liability in the eyes of the bank) and laptops (under the general accounting principles, the value of depreciation after three years is zero).
  • General banks will not lend money to companies in a loss. But let’s not say that startups are profitable. Most startups still have zero revenue. For example, most of the electric car factories, although many of these electric car companies are listed companies with extremely high market capitalization.
  • Banks will require companies that apply for loans to submit repayment plans, but most startup companies can’t even compile financial reports, so the repayment plans come.

Because it is impossible, and because of market needs, the so-called venture capital industry has emerged.

Common myths about unicorns and venture capital

Most people have too many myths about unicorns and venture capital as below:

  • The return is very high: if successful, the return on investment is indeed much higher than that of the stock market investment, not in terms of percentages, but in multiples or even exponential. But don’t forget, almost all venture capital investments ended in failure.
  • The investment risk of venture capital is very high, and most of them end in failure. It is generally recognized that the probability of capital being squandered is more than 99%. Unlike investing in the stock market, no matter how bad it is, most of them can stop losses and get some money back; but this is impossible in the venture capital industry.
  • Quick money is easy to make: a big mistake, most venture capital investment must be locked for at least five years, ten years is a very common period, is a typical long-term investment.
  • I also want to enter, where is the way? Even if the average investor can find a way, 99.99% will be negative, because the entry price of venture capital capital starts at millions of U.S. dollars. So if you are a retail investor, I advise you to bypass early!

Venture capital in a sentense

The so-called venture capital is a very risky investment, and the extremely hight return can only be made from extremely low 1% from their investment targets.

Book recommended

Recommend friends who are interested in this topic, please refer to my other related article “Zero to One“, this book is especially legend on startup, venture capital and unicorns.

Disclaimer

  • The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
  • I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.

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