Tech Unicorns Are Evolving Into What Exactly?

Technology start-ups worth over $1 billion, once considered unicorns, are now plentiful and old enough to herald a new generation behind them—one that looks increasingly sector-specific.

The spread of smartphones and cheap cloud computing have allowed tech start-ups like Uber and Airbnb to grow into household names. Many of these companies have built global empires by simply taking existing businesses like transportation, food delivery and hospitality and making them mobile through sharing platforms. Some of these start-ups have become giants: Uber, for instance, may reach a $120 billion valuation this year, according to proposals from Goldman Sachs and Morgan Stanley.

Nevertheless, as Uber and Airbnb mature and prepare to go public, the easy opportunities for disrupting traditional industries are drying up. For example, Benchling and Blend, firms that specialize in life science data management and digital lending respectively, are two of the many cutting-edge start-ups that may become the next unicorns. Rather than establishing themselves on the presently dying “sharing economy,” where goods and services are shared in a tech-enabled system, these companies largely focus on software targeting micro-changes in specific industries such as agriculture, banking and biotechnology. They are innovating in increasingly niche bases which are transforming the current nature of the broad economy.

CB Insights, a firm that tracks venture capital and start-ups, conducted an analysis of the financial health, strength and size of various start-ups. Its goal was to identify firms that may be on the path to achieving a $1 billion valuation, or unicorn status. The firm discovered that the companies well-positioned for this type of growth were the ones who could establish their dominance in highly distinct areas. It has become clear that start-ups need monopolistic footholds to command their markets in highly specific sectors.

Since the old-guard sharing industries of hospitality and ride-sharing are fading, software start-ups that refresh already existing, outdated platforms will be the next wave of companies that can dictate their terms for markets. In fact, Jason Green, an investor at Emergence, a venture capital firm that invests in cloud software companies, remarks that software is particularly booming because industries require more software tools as they adapt to the technology era.

In an interview with The New York Times, Kirsten Green at Forerunner Ventures, an early-stage venture capital firm, says, “Maybe [software] is not as sexy as the companies in the first wave. Regardless, a lot of those [software] industries are big giant industries that we need in our lives and in business, and they need to be modernized.” Kirsten’s words only reiterate the newly blossoming landscape of the services economy: software is gold and whoever can capitalize on transforming aged technologies into easy-to-use interfaces will be king.

Other potential unicorns, such as Checkr and Earnin, are building businesses off the last generation of unicorns by offering services to them. Checkr provides a modern approach to background checks for companies such as Uber and Lyft, while Earnin offers immediate cash-out to employees working minimum wage jobs at Walmart and Starbucks, for instance, so they can access their pay the minute they leave work. These novel start-ups are paving the road for a new form of companies to emerge, bringing a boutique-like experience to revive typically accepted practices. Instead of designer bags and clothes, these firms provide luxury services to their clients with software, catering to their exact software needs. These services haven’t been at the forefront of an immediate reshaping, yet Checkr and Earnin have easily begun to corner their markets.

Moreover, Forbes has pinpointed three start-ups that are heavily popular among millennial women—Glossier, Zola and Faire—as unicorn candidates. In a similar way, these companies are also establishing trendy industries that hadn’t previously existed. For example, Zola has streamlined the wedding process through their interconnected wedding registry, website creation and invitations. Increased user accessibility has allowed for such niche sectors to become commonplace, especially as general department stores have been suffering revenue losses. Consumers want their exact interests to be met and specialized stores and services can provide that.

As a result, department stores that carry every type of product is most evidenced is falling into the “retail apocalypse.” Department stores such as Macy’s and JCPenney, and retailers including Toys R Us and Abercrombie & Fitch have closed over 4,000 stores total in recent years. Business Insider highlights how visits to malls have declined by 50 percent in the last three years as consumers are shopping online on highly specialized platforms that cater to specific interests. As tech unicorns continue to replace traditional industries with improved software, the “retail apocalypse” will only be ushered in faster.

Coinciding with the coming of this “retail apocalypse” is the high-frequency with which start-ups are being founded. Anand Sanwal, Chief Executive of CB Insights, predicts that at the rapid rate at which start-ups are being created and funded, many startups may even reach the $1 billion threshold in the next year. During individual rounds of venture capital funding, these startups commonly receive $100 million or more, which was once considered an outrageous sum of capital. These amounts, given in multiple successions, have led to explosive investment in start-ups. Today, there are 315 unicorns, compared with 131 in 2015, according to MarketWatch.

Fast-growing high-momentum start-ups are easily the firms that are ripe for investors because there is so much interest in investing in the next big winner. Placed at the right moment, these bets often lead to the next pioneers of niche industries. Risky hedges are the exact reason for the rise of Uber and Airbnb. However, as the sharing economy has become heavily saturated already, it is necessary for investors to examine new, niche companies that have the avenues for future growth.

 

Previously constrained to a “sharing economy” where consumers share goods and services through a tech-enabled system, tech unicorns are increasingly dominating specialty sectors. This can be seen with Pinterest’s recent decision to move forward with their Initial Public Offering (IPO), only the first in the pipeline for the year as Slack, Robinhood and Postmates prepare for their own IPOs. Even mattress company Casper has achieved unicorn status. These tech unicorns are uniquely establishing monopolistic footholds in their sectors. Ultimately, as these start-ups only continue to expand their market presence, it has become clear that they are harkening a new age of specialization in the economy. What remains to be seen is whether the software wave will one day be washed away or if it is on a relentless journey as a growing tsunami.