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How to breed unicorns

Is there a secret recipe for creating unicorns – those rapidly-growing tech start-ups that are not yet listed, often not yet profitable but still valued at $1 billion or more?

The key ingredient, of course, is an entrepreneur with a great business idea. But even the most innovative and determined founder will not succeed unless there is a proper ecosystem to support him or her, providing capital, talent, technology and just enough (but not too many) rules and regulations.

Is there a common factor that allows a country to provide all or most of these requirements? Reading the 2019 Global Unicorn List from Hurun, a China-based research company, makes me think so. And it is size.

You need a lot of entrepreneurs; they need to have big ideas; apply them to big markets; and be able to draw on large helpings of money, people and infrastructure. So it comes as no surprise that unicorns are almost all from large countries and overwhelmingly from just two. Of the 494 unicorns that Hurun counted in June 2019, 409 are found in China and the US, while the top four nations made up 90% of the total.

Table 1: Top countries and cities where the world’s unicorns are based

Country

   

City

   

1

China

206

 

1

Beijing

82

2

USA

203

 

2

San Francisco

55

3

India

21

 

3

Shanghai

47

4

UK

13

 

4

New York

25

5

Germany

7

 

5

Hangzhou

19

5

Israel

7

 

6

Shenzhen

18

7

South Korea

6

 

7

Nanjing

12

8

Indonesia

4

 

8

Palo Alto

10

8

France

4

 

9

Bengaluru

9

8

Brazil

4

 

9

Redwood City

9

Source: Hurun Research Institute

More significant, perhaps, is the fact that China has overtaken the US and India already ranks above any European nation. This suggests that huge domestic markets are starting to tell. Perhaps it is also down to long-term strategic planning and support on the part of the government. China’s determination to lead the world in Artificial Intelligence and nurture other new technologies may be proving more effective than America’s tendency to leave everything to the market. Particularly, if behind the protective barriers provided by the state, entrepreneurs are allowed to flourish freely, maybe even with a disregard for normal rules – as long as they don’t meddle in politics.

A gigantic gene pool from which to draw the cleverest people helps as well, of course. And size matters too when it comes to creating talent hubs and generating network effects. This works in both the Western and Chinese model: while Silicon Valley remains the single largest region for unicorns with 102 or a fifth of the total, Beijing is the unicorn capital of the world – a single city with 82, well ahead of San Francisco’s 55.

Slicing the data by sector is also revealing. While those unicorns with growing brands in consumer markets, such as the multitude of ride hailing and food delivery companies, garner the headlines, most of the value is being created by those providing the “plumbing” of the digital economy – in FinTech apps, the Cloud and Artificial Intelligence. Once again it is largely those who sell the shovels who get rich from the gold rush.

Table 2: Top Industries

 

Industry

No. of Unicorns

% of total value

1

E-commerce

68

9%

2

FinTech

56

22%

3

Cloud

44

7%

4

Artificial Intelligence

40

5%

5

Logistics

34

6%

6

Health Tech

27

3%

7

Media & Entertainment

24

9%

8

Shared Economy

22

11%

9

Software and Services

21

1%

10

Life Sciences

18

3%

Source: Hurun Research Institute

This is borne out by the largest unicorn of them all – by some distance --, Ant Financial, which owns the online payments platform Alipay. Meanwhile, Lufax, Infor and Stripe are all B2B businesses that most consumers will not have heard of.

Table 3: Top 10 unicorns in the world

Rank

Name

Valuation (US$ billion)

Headquarters

1

Ant Financial

150

Hangzhou, China

2

ByteDance

75

Beijing, China            

3

Didi Chuxing

55

Beijing, China

4

Infor

50

New York City, USA

5

JUUL Labs

48

San Francisco, USA

6

Airbnb

38

San Francisco, USA

6

Lufax

38

Shanghai, China

8

SpaceX

35

Los Angeles, USA

9

WeWork

30

New York City, USA

10

Stripe

23

San Francisco, USA

Source: Hurun Research Institute

More could be said: quite a few of these unicorns are actually spin-offs from more established companies. Ant, of course, grew up inside Alibaba. Though, since Alibaba was itself a start-up a generation earlier, many of the arguments I cite above apply to it as well.

More pertinently, the recent fall from grace of WeWork  should teach us not to pay too much attention to such lists: valued at $47 billion at its peak and still at $30 billion by Hurun here, it is now apparently worth just $8 billion. Still a unicorn, but perhaps not for much longer.

Still, the concept will stay with us and thinking about how to nurture and encourage them is something that policymakers everywhere should think about. Asian countries, led by China, have already perfected much of the recipe and the future for unicorns here looks bright.

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