Startups: Unicorns
Uncovering the Unicorns

• Lori Chordas
• March 2019
• 

Key Points

• Becoming Unicorns: A growing number of startups are reaching new heights with $1 billion-plus valuations.
• Room to Grow: While many unicorns are coming from industries like software and on-demand, insurance lags behind.
• Not All Glitter and Gold: Becoming a unicorn is a gold standard but there’s fear that the status can lead to overinflated values for some startups.

Unicorns are mythical creatures often depicted in literary tales. But in today's startup world, unicorns are anything but reverie.

Last year was a record-breaking year for unicorns—startups valued at more than $1 billion. Of the 308 unicorns in existence today, 111 gained their horns in 2018.

Among that new cohort was a handful of insurance startups.

Some insurtechs that have over the years become unicorns include Oscar Health, Zenefits and Gusto, as well as Devoted Health and Root Insurance.

Last year, a $100 million Series D funding round led by Tiger Global Management propelled auto insurtech company Root Insurance's valuation above the $1 billion mark.

Since its founding in 2015, investors including Redpoint Ventures, Scale Venture Partners and Ribbit Capital have poured money into Ohio-based Root Insurance to create and grow its data-driven approach to provide auto insurance policies.

Root uses its proprietary model to assess driving patterns in applicants' smartphones during a test-drive period. Using telematics data as the primary inputs, Root delivers personalized quotes based on driving behavior and overall risk.

Health-y Valuations

Root Insurance isn't alone. Several insurtech startups in the health space have over the years attracted the attention of investors who are hungry to support new ventures looking to disrupt the insurance market.

In 2015, a $145 million investment of new capital led by Goldman Sachs, Horizon Ventures, Wellington Management and Peter Thiel's Founders Fund catapulted Oscar Health's valuation above the $1 billion mark.

Oscar Health, which sells individual health insurance through exchanges, was created by venture capitalists Joshua Kushner, Kevin Nazemi and Mario Schlosser during the wake of the Affordable Care Act in 2013.

“When CEO Mario Schlosser and his wife had their first child several years ago they had a very difficult experience navigating the health care system. Mario and his two co-founders wanted to build a technology-driven health insurance company focused entirely on the customer experience to make it easier, seamless and more engaging for members,” said Louis DeStefano, Oscar's vice president of sales.

Becoming a unicorn came at a pivotal point for the company. In 2015, Oscar Health grew its enrollments from 17,000 to 40,000 members, had captured nearly 15% of the New York individual health marketplace and was expanding into other markets including Texas and California.

Since then, continued growth has solidified its mark as a unicorn. Today, Oscar's valuation tops $3.2 billion, thanks to a 2018 new round of funding led by Founders Fund and Google's parent company Alphabet.

Two other health insurers, Clover Health and Devoted Health, became unicorns in 2017.

Clover Health, which uses a proprietary technology platform to collect, structure and analyze health and behavioral data to improve medical outcomes and lower costs for patients, hit the $1 billion valuation mark after receiving $130 million from investors including GV, Alphabet Inc.'s venture arm.

Also that year, several funding series, including $7.4 million in seed investments and funding from Venrock, and Todd and Ed Park, vaulted Devoted Health into unicorn status. Devoted Health, a next-generation Medicare Advantage plan that uses technology to deliver a coordinated health care experience for its members, is a “payvidor” that integrates being both a payor and provider of health care services.

On Our Way

In 2013, venture capitalist Aileen Lee wanted to coin a term to describe software startups valued at $1 billion or more. She chose “unicorn” because she believed finding a company with such lofty valuations was as rare as stumbling upon a chimerical unicorn.

At that time, less than 1% of startups fit that bill.

The odds of entrepreneurs and investors building or investing in a billion-dollar company in 2013 were “somewhere between catching a foul ball at an MLB game and being struck by lightning in one's lifetime. Or, more than 100x harder than getting into Stanford,” Lee wrote in an article, “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.”

Today, however, 308 private companies have defied those odds by topping the $1 billion valuation mark, according to CB Insights, a research firm that tracks venture capital and startups.

Included in that elite cohort, who have together raised more than $256 billion, are household names such as Lyft, Postmates, DoorDash and Pinterest, along with a handful of insurtechs.

Last year, the continued outgrowth of investors interested in capturing value in the private market led to a year of lofty valuations, said Matthew Wong, a senior research analyst at CB Insights.

“Take SoftBank, for instance, which operates a $100 billion fund in today's private market. The group has created many new unicorns across different verticals. Also a number of public market investors, corporations and other growth-stage venture funds globally are all investing in these companies and doing so at fairly significant valuations,” he said.

That availability of capital, along with competition to invest in higher quality companies, has significantly led to soaring valuations, especially in later-stage financing rounds, Wong said.

While nearly two dozen financial services startups, including insurtechs, now call themselves unicorns, the insurance industry has a long way to go to reach the likes of industries such as internet software and services, e-commerce and on-demand that dominate the unicorn space, he said.

“That's because this wave of insurtech startups is still a relatively recent phenomena. And since many were formed only over the last three to five years, it's still fairly early in the maturity spectrum,” Wong said.

It's also still too early for discussions about any type of large valuations above $1 billion in the insurtech space, he said. “Also, many of these valuations are formed off of growth and momentum, so we may not see some of that growth materialize as quickly as in other verticals because insurance is a risk business. In some cases, companies have to ensure that they're growing sustainability, profitability and with the right constraints in mind,” Wong said.

Keys to Success

Investors looking to pour millions, if not billions, into startups often seek companies focused on innovation and those creating new or niche markets.

They're also looking for entrepreneurial ventures with an intent focus on the customer, said Rick Chen, a spokesman for Gusto, a provider of HR and benefits tools.

Gusto, which rebranded from ZenPayroll in 2015, “overinvests” in the customer experience and educates its customer service agents on payroll principles, state tax laws and benefits jargon, he said. “That eliminates canned responses and empowers agents to answer customers' questions and share suggestions about how things may apply to their business,” Chen said.

While becoming a unicorn has become a gold standard for success, the title remains rare or largely unattainable, said Didi D'Errico, vice president of communications for Zenefits.

Zenefits, a benefits administration tech platform and SaaS provider, became a unicorn in 2015 with the financial backing of investors such as Andreessen Horowitz, TPG Growth, Fidelity Investments, Insight Venture Partners and Y Combinator.

“While the unicorn status is good for awareness and investment, a lofty valuation without the right business model, top-notch talent, the right systems and infrastructure, market fit and customer experience will not be sustainable,” D'Errico said.

“The storied Silicon Valley concept of a growth hack, or shortcut, is rarely more impactful than embracing the grind of doing the right things to build and sustain a business the right way,” she said.

“To embrace the grind, companies need to run their business efficiently by building the right foundation, the right team, the right strategy, the right products and services and continually test and adjust all the pieces to stay in front of the market and customer needs. It comes with a lot of work, but these are the ingredients to success—with or without the unicorn title,” D'Errico said.

While startups strive to achieve that title, and the glamour that comes with it, being a unicorn doesn't guarantee success.

Sometimes it can lead to overinflated values, Wong said.

“The biggest downside is that the company never realizes its valuation and the company either has to raise additional capital at a valuation lower than that unicorn valuation or it doesn't end up being a successful company, in which case employees who are shareholders or investors lose out,” he said.

In 2017, seven startups, including online lender Prosper and The Honest Company, an American consumer goods company founded by actress Jessica Alba, lost their unicorn status due to lower valuations in subsequent funding rounds, according to industry reports.

“There can also be certain downside protections attached to investors in the later stage rounds. In the event of an exit, such as an IPO or acquisition, investors who hold preferred stock receive their money back before any of the common shareholders, namely employees and founders. So it can be a potential downside if the company isn't growing into that valuation,” Wong said.

Many startup entrepreneurs are heavily focused on fundraising and public relations early on, “but instead they should be concentrating on their business, products and what customer pain points they can help solve,” Gusto's Chen said.

“Business metrics like revenue follow as a result. If you have not-so-great products but really great marketing your business won't go anywhere. Instead focus on solving problems and efforts; no shortcuts can be taken,” he said.

Unicorn Hotspots

The United States continues to lead in share of unicorns.

Last year, nearly half of all new startups originated in the United States, followed by China, which saw a slight decline from 30% of new unicorns in August 2018 to 26% earlier this year, according to CB Insights.

America is an ideal breeding ground for billion-dollar companies. The nation has the largest global economy by gross domestic product and is home to tech hubs like the Silicon Valley.

China, which boasts more online users than India and the United States combined, offers its own appeal for entrepreneurs and investors. The nation's internet industry is developing at breakneck speed. Also, while American startups take an average of seven years to reach unicorn status, it takes just four years in China, according to a Boston Consulting Group report.

The percentage of Chinese unicorns that reached $1 billion valuation within two years was about 46%, compared to just 9% for U.S. unicorns, according to the report.

While China has emerged as a unicorn hub, unicorns also are coming recently from areas like Latin America and Southeast Asia. India is now home to more than two dozen unicorns.

Leaping Ahead

Unicorns aren't the only lexicon in the startup vernacular. There's a rise in decacorns, or startup companies with an estimated valuation of more than $10 billion.

Today 19 private companies, including Uber, SpaceX, Airbnb and data analytic software company Palantir, have traded in their unicorn status to become decacorns.

Currently no insurtech unicorn has yet gained that illustrious title, but some industry experts believe that could one day change.

Last year, venture capital funding in the United States reached nearly $100 billion, according to PwC and CB Insights' quarterly Money Tree Report. That's the second highest recorded total since the 2000 dot-com boom peak.

VC funding also continues to flow into existing insurtech unicorns.

Earlier this year, Clover Health raised $500 million in a Series E funding round led by Greenoaks Capital. Clover plans to use the funds to grow its core Medicare Advantage business, deepen ties with physicians and improve the quality of care its members receive. Last year, the company broke new ground by developing an in-home primary care program that incorporates genomic testing to help reduce hospital readmissions and improve care outcomes.

In August 2018, Google's Alphabet invested $375 million to help Oscar Health expand into Medicare Advantage and grow beyond its nine states and 14 markets, Oscar's DeStefano said.

Also last summer, Gusto nearly doubled its valuation to $2 billion thanks to a $140 million Series C funding round led by T. Rowe Price Associates, Y Combinator Continuity Fund and General Catalyst.

Gusto's Chen, however, doesn't put much weight on valuation.

“We don't see a $1 billion or $2 billion valuation as a milestone in and of itself. It's just something that offers opportunities like hiring more engineers and other staff to build features such as Flexible Pay to better serve our customers,” he said.

“Many people, especially in the Silicon Valley, are focused on two headline metrics: valuation and a company's real estate or number of employees,” Chen said.

“But as our co-founder Josh says, at the end of the day we aren't doing our job if small businesses are continuously getting fined by the IRS for doing payroll incorrectly or if small-business employees don't have access to health insurance. Everything we strive to do is focused on investing back into our customers,” he said.

While the pace of new entrants into the unicorn club slowed early last year, billion-dollar organizations made a comeback in the third quarter, according to PwC and CB Insights. Experts anticipate a similar trend again this year. But how long that trend will continue have some questioning whether the unicorn bubble will eventually bust.

“Eventually we'll see a shift in the trend,” CB Insight's Wong said.

“Thus far the trend has been large financing valuations outpacing IPOs. Eventually we'll start to see that change a bit. Companies that have raised those significant valuations eventually will need to have a liquidity event or go public, especially those who have been operating for 10 or more years, which many unicorns have,” he said.

“I think we'll continue to see billion-dollar valuations in the tech market because of the plethora of structured capital sources. So we will see more companies accrue a lot of valuations while they're private,” Wong said.

But that could one day change.

“There's been an outgrowth of different types of investors and a frothy environment over the last several years, but that may soon subside a bit,” Wong said.