the harsh

Highly valued private companies, the so-called ‘unicorns’, are becoming big players in crossborder investment. Alex Irwin-Hunt examines their expansion strategies and how IPAs can best negotiate their fast-evolving world.

The term ‘unicorn’ – meaning a private company with a valuation of $1bn or more, typically defined by its funding rounds – was coined by venture capitalist Aileen Lee in 2013. The name of a mythical creature was used to emphasise the statistical improbability of start-ups joining Ms Lee’s list of 39 highly valued US-based software companies founded since 2003.

Now unicorns are plentiful, and their number of crossborder investments rose sixfold between 2010 and 2017, according to a report by consultancy firm MCJ Lemagnen Associates (MCJLA).

The unicorn dream

Unicorns are about more than just abstract figures, however. “Attracting international tech scale-ups and unicorns is important as it enriches our region with new ideas, technologies, mentality and talent,” says John Verzeele, director of inward investment at Flanders Investment & Trade, an investment promotion agency (IPA) based in Belgium.

The benefits of unicorn investment has created a gold rush among IPAs, who are trying to connect with this fast-paced world of highly valued private companies, the majority of which are tech-based.

“Intense competition for unicorn investment and the fact that there will be a great deal of background on their investment intentions means the [IPA] proposition will have to be robust and capable of competing against the proposition from some of the most aggressive investment agencies globally,” says Ken Poole, head of economic development at Welsh IPA Invest in Cardiff.

From unicorn to decacorn

As many as 310 private companies featured on the 2019 Global Unicorn List put together by CB Insights, a firm which tracks venture capital and start-ups. Some 112 of those joined the list in 2018 alone.

Also, 20 unicorns have been propelled to ‘decacorn’ (those with a valuation of greater than $10bn) status, including Uber, Airbnb and WeWork.

Smartphone use and cheap cloud computing have enabled unicorns to build their empires by making existing industry sectors such as taxis, food delivery and hotels mobile friendly. Their disruption of various industries through the introduction of new technologies has left traditional companies and IPAs playing catch-up.

MCJLA’s report, FDI and the Rise of the Unicorns, assessed the global location and expansion strategies of 2200 companies (past, present and potential unicorns) in 53 countries between October and December 2018.

While almost two-thirds of the unicorns in the study did not make any crossborder investments between 2010 and 2017, 718 companies made almost 3000 crossborder investments worth an estimated Ä55bn into more than 93 countries. The top four investors were Chinese e-commerce giant Alibaba, US social network Facebook, US car producer Tesla – all of which are no longer classified as unicorns – and flexible office space provider WeWork.

The unicorn boom is partially explained by the rapid evolution of the tech industry, in which former market leaders lose market share to innovators.

“In the IT space, product lifecycles are very short and competitive advantage is lost very quickly,” says Michel Lemagnen, managing director of MCJLA and co-author of the report. “Look what happened to Nokia and Blackberry with touchscreen phones. Companies have to move at a galloping pace.”

A different breed

From an investment point of view, the difficulty with unicorns is that they are inherently different to established companies engaged in FDI, in terms of both the pace of and reasons for their international expansion.

“If, for large corporates, the main motive [for seeking new locations] is likely to be the optimisation of their existing business structure, for unicorns it is all about growth via customer acquisition,” says Manta Katinas, CEO of Invest Lithuania.

High-quality talent pools are of paramount importance to unicorns, who need tech talent to fuel their rapid growth. “This is the precise reason why unicorns seldom consider outsourcing to such locations as the Philippines or India, whereas a large corporate might establish a business process outsourcing centre for several thousand people there,” adds Mr Katinas.

MCJLA’s study emphasised that while unicorn companies may establish operations anywhere in the world, it is preferable to scale up in larger markets where previous start-ups have thrived, due to the need for access to a large customer base, tech expertise and funding for expansion and consolidation.

As a result, unicorns are often keen to expand into the US “primarily because it is a large homogenous market. As a direct result of that, businesses will also be more attracted to US-based investors as they are familiar with the target market,” says Alon Kuperman, director of tech investment specialist GP Bullhound. “When deciding upon expansion locations, the primary reason should be because the market is a good fit for the product or service being offered.”

Access to ‘smart’ private capital is essential for unicorns, because they often need assistance to expand internationally. “Venture capitalists play a significant role in international expansion,” says Richard Goold, partner and fast growth leader at professional services giant EY. “Many of the best global investors have programmes, teams and networks to help these businesses scale across borders.”

Indeed, the increasing availability of private capital – global corporate venture capital funding spiked by approximately 47% to $5bn in 2018, according to CB Insights – led by investors such as SoftBank Group and Sequoia Capital has played a role in the rise in the number of unicorns and their international expansion.

Practical benefits 

FDI from unicorns can have a string of benefits for local economies: it can ignite further tech investments, and attract more government support for local IPAs.

“While our primary objective is bringing jobs to the country, convincing a unicorn company to open even a small office with a handful of specialists works wonders for elevating the country’s brand in the tech sphere,” says Mr Katinas of Invest Lithuania.

Stefan Klein, key account manager of the digital economy and e-commerce at Hamburg Invest, adds: “The high quality of life in Hamburg certainly helped to attract US tech companies such as Google, Facebook or Twitter, when you could still call them unicorns. These companies stimulate further investments and contribute to the local start-up ecosystem.”

Mr Poole of Invest in Cardiff says: “In our experience, unicorn attraction also provides a boost to city policymakers in helping to attract additional support for start-ups and convincing city leaders of the need to put additional resources into FDI.”

These benefits explain why IPAs are keen to attract unicorns, and the MCJLA report found that 38% of executives at the companies it surveyed have had experience with economic development and IPAs when expanding internationally.

“There is a perception among unicorns and aspiring unicorns that IPAs are slow to respond, and in some cases that is a reality, but in other cases IPAs are asked questions which can sometimes be very difficult to answer.” says Mr Lemagnen of MCJLA.

As unicorns continue to grow in number, IPAs will have to stay up to date to secure the benefits this new kind of company has to offer and the future tech investments that tend to follow in their wake.

This article is sourced from fDi Magazine
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