Unicorn status: a good thing or bad thing for fintech?

There are now more than 237 unicorns globally, and fintechs make up 11 percent of this exclusive group, according to CB Insights, a database that analyses the results of venture capital companies and startups.

For a startup to be deemed a unicorn, it must be privately held and valued at more than $1 billion. With such a hefty price tag it is unsurprising that few startups reach these lofty heights. Which is why those that do are considered as rare the mystical creatures they’re named after.

The success of challenger banks is emblematic of the great innovation and growth within the European fintech sector. Adding another unicorn to the big global league points towards the huge potential for the continent’s capacity to incubate similar success stories.

However, Europe has historically lagged behind the US where funding for fintechs is concerned. This is primarily because the venture capital industry in Europe isn’t quite as well-established as it is in the US. Funds are smaller, meaning there is less capital available to invest. But as the size of European fintech funding rounds continue to swell, is this a sign that the tides are changing?

Perhaps, but regardless of whether this is indicative of an increase in the amount of available funding and growth opportunities, many observers are beginning to ask whether this route to unicorn land is one that other fintech startups should pursue at all.

Of course, the benefits of achieving unicorn status seem obvious to most. The title instantly brings with it an additional layer of credibility to any proposition, by recognising that the company has a globally viable and scalable model. This in turn creates momentum and improves the sense of focus across teams in the company.

What’s more, it drives profile amongst consumers, target audiences, and external stakeholders. For many startups, either in the financial services sector or elsewhere, the vision is a global one. And while it may not be as challenging to build the brand’s profile on home soil, reaching consumers on a global level is often a entirely different ball game.

The dark side of unicorns

But despite the benefits, achieving unicorn status is no guarantee of future success. In 2017 seven startups lost their ‘horns’, according to reports in Recode, due to lower valuations in subsequent funding rounds.

There has been a notable increase in the number of these ‘downrounds’ that value a company at less than the previous round. In 2016, the New York Times reported that Foursquare had raised $45 million, cutting its earlier valuation of $650 million in half. Once a much-hyped startup touted to topple Facebook, the company no longer enjoys the popularity it did a few years ago.

While the fintech sector has been more resilient than others when it comes to downrounds, it’s certainly not immune. In 2016, the marketplace lending platform LendingClub ousted its CEO, revealed it was under federal investigation, and lost several of its investors within the space of a few months. According to analysis by TechCrunch, its share price had dropped by more than 50 per cent by December 2016 following this period of reputational turbulence. This may be one example in a small number of similar cases, but stories such as this mean that many in the industry are starting to view the unicorn label as more hype than substance.

While billion-dollar valuations almost guarantee swathes of positive coverage in the press, therefore building the brands’ profile, the flip side of this level of attention is an increased level of scrutiny. Every time a senior team member leaves or there is a glitch with a new feature, the headlines are more likely to be critical and ultimately unhelpful.

On balance, unicorn status is essentially just a label for fast-growth fintechs. More important is the strength of the underlying business and their in-market propositions. Management teams don't need additional pressure, they need products that work and a strong user base. They do need finance, but it's important that the capital is looked at as the beginning of a new phase of growth, not the result in itself. Finance only works in conjunction with all the other aspects of a healthy business, including co-operation of the management team and a solid go-to-market strategy.