The Rise of Unicorn IPOs and Their Impact on the Market

In the fast-moving world of startups, one of the latest trends is that companies are going public. Businesses are extremely interested in launching an Initial public offering (IPO) as they seem to be gaining huge advantages and quick growth by being associated with it.

This article will explore why some startups aspire to be so successful as to become what is known as unicorns. These Initial public offerings affect the business world and the investors. Moreover, we will also discuss the implications for the whole market and what it means for future investments.

The Unicorn Stampede

The last decade has seen a remarkable surge in unicorn IPOs. These are startups valued at over $1 billion, called “unicorns,” going public. The term was coined to highlight their rarity but the landscape has transformed a lot. From 39 new unicorns in 2013, the rate jumped to 1200 in 2024 and continues to soar. 

Several factors fuel this unicorn boom. Typically, tech-centric, these startups challenge the market leaders by offering innovative solutions. A global shift towards digital platforms, due to the pandemic, has also played a crucial role. Whereas, low interest rates in recent years have made it easier to get capital.

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This is why companies are eager to launch their Initial public offering (IPO) for the massive benefits. But is it the instant growth that drives this trend? Or there is more to it. We will discuss exactly that next.

Driving Forces Behind the Unicorn IPO Wave

While the motives behind going public can vary for different startups, there are a few key factors that dictate this decision in most cases:

Increased Demand for Unicorn IPOs: These companies are in high demand because of their high growth ceiling. This attracts a massive investment pool and cash injection from investors. Thereby allowing them to access vast amounts of capital for their future growth and expansion.

Maturity breads sustainability: Numerous unicorns have matured and obtained efficient business models, a loyal customer base, and distinct ways to become profitable. This stability makes them highly attractive to public market investors seeking long-term returns.

Tech-Focused ETFs: The growth of technology-focused Exchange-Traded Funds (ETFs) has significantly contributed to the demand for unicorn IPOs. These ETFs reduce an investor’s risk by diversifying their portfolio across fast-growing companies, which is one of its many advantages that can be found here:
https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp. By doing so, they have fueled investor’s appetite for unicorn IPOs.

Liquidity Opportunities: Public markets offer better access to cash flow for early investors as compared to private markets. This liquidity encourages early-stage investors to support and push for IPOs. Allowing them to capitalize on the growth of these companies.

These factors may seem very beneficial for the unicorns. But there is another side to this, faced with challenges and irregularities.

Navigating the Challenges of Going Public

Going public has lots of benefits but comes with challenges that impact these billion-dollar startups. So let’s discuss the main challenges that affect unicorn IPOs. 

Lack of Dedicated Stock Exchanges: The US has Nasdaq and the UK has the London Stock Exchange (LSE). But, many countries lack stock exchanges tailored for startups. Existing exchanges may have strict listing norms that don’t align with the innovative and growth-oriented unicorns.

Market Conditions: A GDP strength and economic climate can impact a unicorn’s ability to have a successful IPO. Low inflation and interest rates encourage investors to back newer IPOs. While high inflation and interest rates will make them risk-averse. Which in turn affects these startups that rely on venture capital for support.

Government Policies and Tax Laws: Unicorn startups must carefully navigate the evolving government policies and tax laws. As administrations change, the approach to business policies can shift. Startups must continually adapt operations to remain legally compliant. Failure to do so could result in potential tax violations or penalties.

Market Impact and Ripple Effects

Unicorn IPOs disrupt the overall market by challenging old business practices. Their influence pushes major industries to adopt new technologies and marketing trends. This leads to a rethinking of previously closed possibilities and market behaviors.

For example, the aerospace sector rejuvenated with the rise of companies like SpaceX. Which are now seeking a $200 billion valuation as per the following report https://www.streetinsider.com/Hot+List/Musks+SpaceX+may+sell+shares+at+%24200B+valuation%3A+Bloomberg/23274144.html.

Similarly, Databricks ($43 billion valuation) has also fueled advancement in the data analytics industry.

A large amount of capital gets injected into the market because of these listings. This increases liquidity and facilitates overall economic growth. 

However, unicorn IPOs often lead to very high company valuations, setting new standards that could create a market bubble. In a bubble, companies are valued beyond their true worth. 

For instance, the combined valuation of the top 10 unicorns as of May 2024 stands at $852 billion. These numbers can create short-term volatility in the market, putting long-term investors at risk.

Besides, it also seems like a rapid growth formula for newer businesses. Which can shift their focus from long-term sustainability to short-term gains. 

So, the surge in public listing of unicorn startups is a two-sided sword that brings with it both opportunities and challenges.