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Uber, Airbnb, BuzzFeed and more. Now I Get It: Unicorns

You’ve probably heard the phrase “tech unicorn” before … It’s a buzzword that’s used to describe high-value companies like Uber and Snapchat. But what exactly does it mean and how does a company become a unicorn?

A unicorn is any private startup that’s valued at over $1 billion. Now that doesn’t mean that the company actually has $1 billion in cash, in fact, most have a whole lot less. What it does mean is that the company is exchanging equity for cash as if it were worth at least one billion, so a $10 million investment would buy you 1% of the company.

There are currently 142 start-ups that fit the bill, and together they’re worth about $506 billion. Of those 142 companies, there are 13 deca-unicorns, or companies valued at more than $10 billion. The term unicorn usually signifies a rarity, but we’re encountering a herd of these mythical creatures. When the term was coined in 2013, there were only 36 companies that qualified as unicorns. The number of tech unicorns has increased by nearly 400% in just two years. To some, this rapid increase signals that we’re in bubble territory.

Let’s put this into perspective, because a billion dollars is a lot of money—even companies like Google (GOOGL) and Amazon (AMZN) were worth less than a billion dollars before they went public. So far this year, 58 companies have been valued at over $1 billion.

So are these companies overvalued? Maybe. Some venture capital firms argue that we’re in one of the most robust periods of innovation ever, and that there’s plenty of room for even more billion-dollar-plus tech giants.

Critics argue that we’re in store for some dead unicorns. They think that venture capitalists and companies are too eager to make it to that one billion dollar mark and that it has become more of a status symbol than a fair measure of value.

We’re also seeing a slowdown in initial public offerings as companies chose to remain private and receive more investor funding to remain liquid. Private companies don’t have as much pressure to monetize and don’t need to share financial information with the general public.

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Uber recently raised $1.6 billion in convertible debt through Goldman Sachs (GS) private wealth clients—that means they sold bonds to individual wealthy investors instead of opening up shares to the general public. If this catches on, tech startups might be able to keep their valuations inflated and raise liquidity without ever going public—but that’s a whole other can of worms.

So there you have it. Are we in a tech unicorn bubble? Possibly; the answer is still unclear. What is clear is that these unicorns are titans that will make a large impact on the future of industry and our global economy for some time to come.

Correction: a previous version of this article miscalculated 1% of $1 billion.

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