How to Catch a Unicorn An exploration of the universe of tech companies with high market capitalisation Author: Jean Paul Simon Editor: Marc Bogdanowicz 2016 EUR 27822 EN How to Catch a Unicorn An exploration of the universe of tech companies with high market capitalisation This publication is a Technical report by the Joint Research Centre, the European Commission’s in-house science service. It aims to provide evidence-based scientific support to the European policy-making process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of this publication. JRC Science Hub https://ec.europa.eu/jrc JRC100719 EUR 27822 EN ISBN 978-92-79-57601-0 (PDF) ISSN 1831-9424 (online) doi:10.2791/893975 (online) © European Union, 2016 Reproduction is authorised provided the source is acknowledged. All images © European Union 2016 How to cite: Jean Paul Simon (2016) ‘How to catch a unicorn. An exploration of the universe of tech companies with high market capitalisation’. Institute for Prospective Technological Studies. JRC Technical Report. EUR 27822 EN. doi:10.2791/893975 Table of Contents Preface .............................................................................................................. 2 Abstract ............................................................................................................. 3 Executive Summary ........................................................................................... 4 PART I - An exploration of the universe of tech companies with high market capitalisation 1. The age of unicorns ................................................................................ 6 1.1 The sample ........................................................................................... 9 2. Analytica: main observations ............................................................... 18 2.1 Growth models: organic v. inorganic (M&A) ............................................. 18 2.1.1 A dominant organic and two-steps growth model .....................................19 2.1.2 A marginal but relevant M&A growth model .............................................21 2.2. The role of the business environment ..................................................... 23 2.2.1 A strong access to finance .....................................................................23 2.2.2 A dense ecosystem of founding fathers (and mothers?) ............................35 2.3 An R&D-intensive environnement ........................................................... 39 3. De Interpretatione: what can explain the unicorn phenomenon? ......... 41 3.1 The technological trend: Unicorns are surfing on the internet mobile wave .. 41 3.1.1 The deployment of mobile Internet, the role of smartphones. ....................43 3.1.2 The rise of the apps economy ................................................................45 3.1.3 Are all unicorns born mobile? ................................................................48 3.2 The economic trends ............................................................................ 50 3.2.1 Unicorns go global to make the best out of leapfrogging ...........................50 3.2.2 Unicorns and the "transformation of everything else"? ..............................52 3.3 Conclusions ......................................................................................... 54 4. Conclusion: a role for policies? ............................................................. 55 4.1 Did Europe miss the mobile turn? ........................................................... 55 4.2 Direct or indirect policies? ..................................................................... 58 4.3 Regulating disruptions? ......................................................................... 59 4.4 Promoting competition and innovation? ................................................... 61 References ...................................................................................................... 63 List of figures .................................................................................................. 71 List of tables .................................................................................................... 71 List of boxes .................................................................................................... 71 Appendix 1: List of investors ........................................................................... 72 Appendix 2: A side question ............................................................................ 76 PART II – Case Studies is available as a separate document 1 Preface This report was prepared in the context of the three-year research project on European Innovation Policies for the Digital Shift (EURIPIDIS), jointly launched in 2013 by JRC- IPTS and DG CONNECT of the European Commission. EURIPIDIS aims to improve understanding of innovation in the ICT sector and of ICT-enabled innovation in the rest of the economy. The project's objective is to provide evidence-based support to the policies, instruments and measurement needs of DG CONNECT for enhancing ICT Innovation in Europe, in the context of the Digital Single Market for Europe and of the ICT priority of Horizon 2020. It focuses on the improvement of the transfer of best research ideas to the market. EURIPIDIS aims to: 1. better understand how ICT innovation works, at the level of actors such as firms, and also of the ICT "innovation system" in the EU; 2. assess the EU's current ICT innovation performance, by attempting to measure ICT innovation in Europe and by measuring the impact of existing policies and instruments (such as FP7 and Horizon 2020); and 3. explore and suggest how policy makers could make ICT innovation in the EU work better. The report is available as two separate documents – Part I contains an analysis of innovative tech companies with high market capitalisation, which is based on investigation of a qualitative sample of 30 case studies, see Part II. 2 Abstract Technology companies with high market capitalisation (often called unicorns) have been receiving a lot of attention and media coverage recently. In general, unicorns are IT-centric (software mostly, but also hardware). They are often rather young global companies that match unsatisfied demand with supply through the production (which can easily be scaled up) of innovative and usually affordable services and products. These are usually part of the mobile internet wave, and rely on connectivity (high speed networks, mobile and fixed), new devices (smartphones, tablets, phablets…) and the opportunities these bring. They are grounded in network effects, and demand-side economies of scale and scope. They depend on a strong favourable business environment, developing organically and building on fast expanding markets (emerging economies, middle classes). They are Venture Capital-dependent and the competition for funding can generate impressive (i.e. inflated) valuations. These companies can be disruptive for other sectors and firms. This report aims to document the phenomenon by investigating a qualitative sample of 30 companies that have recently been valued above the one billion dollar threshold. It identifies some of their characteristics and the lessons to be learnt. The report has two parts: Part I contains the overall findings of the investigation and some suggestions for policy makers. Part II contains a detailed account of the case studies on which the investigation is based. They are published as separate documents. 3 Executive Summary Technology companies with high market capitalisation (often called unicorns) have been receiving a lot of attention and media coverage recently. The current hype does not fully reflect reality and is often a simplification. To start with, unicorns are heterogeneous: they are strongly defined by their financial aspects, and though these may have some common traits, they are generally very diverse in terms of developments across sectors, business models, organisational and growth models, etc. This report aims to document the phenomenon by investigating a qualitative sample of 30 companies1 that have recently been valued above the billion dollar threshold. This is a simple exploratory exercise that cannot capture all aspects of unicorns. It does, however, identify some of their characteristics, offer speculative interpretations and discuss lessons learned. The report is based on a review of dedicated literature2, technical journals and trade press articles, and on the analysis of annual reports of publicly-traded companies. The publicly available information is scarce and highly heterogeneous. However, what has been gathered allows us to make some observations about these companies: 1. Most of the companies in the sample grew organically, while only a few grew by acquiring new businesses in mergers, acquisitions or take-overs. 2. Unicorns all rely to some extent on venture capital for their initial funding, their developments, and their exits. The extent to which they need VC funds varies according to the strategy they adopt. For instance, an organic growth strategy requires less money than an inorganic model. 3. The founders are often “serial entrepreneurs” who have created other companies before. Most of them are seasoned business people with strong academic backgrounds. 4. Many unicorns have a significant