Venture capitalist Aileen Lee coined the term “unicorn” six years ago, describing U.S.-based software companies that started after 2003 and were, at that time, valued at over USD 1 billion by public or private market investors. Back in 2013, only 39 companies were qualified to join the so-called “Unicorn Club” (UC).
Things have changed since then. The concept has become broader as 1) other countries do breed successful upstarts as well; 2) non-software private tech companies also grow and get funded fast; 3) date of founding is flexible as some firms are prone to hibernate. These shifts along with economic development and improvement in the field of private equity opened a door to newcomers, which joyfully entered the UC.
Machine intelligence platform CBInsights keeps an eye on the majority of companies-UC members and, as of August 14, 2019, 391 enterprises from all around the world are on the list. EqualOcean prepared a series of articles covering key economic sectors comprising the largest number of such upstarts, and this one is about hardware producers.
EqualOcean distinguishes five subindustries in the hardware sector: semiconductors (chips and microelectronics), robotics (industrial engineering and smart manufacturing), consumer electronics, data centers (IT hardware & real estate) and Internet of Things.
Fifteen companies representing five countries (China, the U.S., Israel, the U.K., and the Netherlands) make up the herd. Meanwhile, there are 53 Internet software & service companies, 48 retailers, 46 fintech giants, 31 AI-related businesses and some other big categories in the UC globally. Hardware firms are rare therein. Besides, a considerable note is that all the above-mentioned groups comprise firms that may also be classified as hardware companies. Moreover, the vast majority of so-called “tech companies” can’t exist without proper hardware infrastructure.
Consumer electronics category comprises six unicorns with a combined market valuation of USD 26.39 billion. Among them, three “middle-aged” Chinese companies (Meizu, Coocaa, and DJI) are those yesterday leaders that are about to prove their resilience in ever-changing Asian markets. U.S.-based augmented reality player Magic Leap has recently been facing a wave of hype, but yet to show its pivotal capabilities and thereby to solve the market positioning problem.
CBInsights tracks only one unicorn semiconductor, we have way more of those existing out there. For one, as Crunchbase indicates, there are 10 pre-IPO chipmakers that have raised more than USD 250 million each to date. Only in China, there is a massive state-backed campaign for the semiconductor industry development that has some interim results: four more-than-unicorn-sized companies went public on the Shanghai sci-tech board last month. And another one joined them two weeks later.
The same story can be told about the IoT (Internet of Things) industry. Andreessen Horowitz-backed one-year-old Samsara networks is definitely not the only highly valuated company building its business around connecting smart devices in smart ways. It is quite promising though: the upstart was just founded in 2018 and reached the current heights in a bit more than one year.
A dispersed group of the four robotics companies includes manufacturing behemoth UBTech, industrial automation, and warehousing three-year-old company Geek+ (both from China) and American 3D printing enterprises Carbon and Desktop Metal. These four firms together constitute almost USD 10 billion of known venture capital funding.
"Data centers" is the most diverse category here as it contains the British industry heavyweight Global Switch (that, by the way, was founded in 1998) and another European company – blockchain advocate Bitfury. Surprisingly, the third player in the clique is also a non-US-or-China-based firm: Infinidat, a Middle East IT unicorn, is headquartered in Tel Aviv.
A whole gamut of tech business models could be found in the “hardware blessing” of today’s UC. More importantly, they differ not only by the nature of money-making mechanisms, strategy, culture and other qualitative aspects but also by some important performance indicators.
For startups time is everything. They usually either grow fast, igniting burgeoning local ecosystems, or die at the first stages of their lifespan. Unicorn status is a sort of acid test for the core business model. It is also a peculiar psychological threshold indicating that a firm has shown serious ambitions and obtained high market recognition to date.
EqualOcean parcels out two groups of companies within the hardware sector – industry veterans and game-changing rookies.
Industry veterans – experienced companies that entered the UC after a long period since establishment. They possess a well-built business, maintaining a significant market share. Some of them have already blazed their paths to the public markets, other – remain operating as a private company. Exposure to the new external challenges that industry veterans haven’t encountered before is among key risk factors.
Global Switch, an obvious outlier in the sample we analyze, is a USD 11 billion-valuated company that started selling its stakes a long time ago is currently preparing for an IPO in Hong Kong. The rest of “veterans” is made up of those “middle-aged” Chinese corporations producing consumer electronics (Meizu, Coocaa, and DJI).
Game-changing rookies – relatively new firms that hopped in the UC quite fast, closing numerous venture capital financing deals. Eleven names remaining fit into this category. One of the common features of these companies is their up-to-date business profile. Here we can meet all the robotics unicorns accelerating IIoT (Industrial Internet of Things) ecosystem creation on either side of the Pacific Ocean.
Beijing-based chipmaker Bitmain Technologies carried out Series B round of funding in 2018, after five years of development, – pretty unusual speed for ultra-intensive China’s market. The round was huge though: USD 422 million raised from Crimson Ventures that is focused on e-Business infrastructure and communications industries.
Funding is a matter of great importance and often the first thing to explain bloated market valuations. Let’s take a glance at how the leading private hardware companies’ financial landscape looks like.
The total market valuation of the 15 exceeds USD 65 billion when the amount of known investment is less than USD 15 billion. Thus, the hardware sector could be characterized by a valuation-to-funding (VF) ratio of at least 4.5. In fact, it is less than this number as a handful of companies raised an undisclosed amount of money through several funding rounds. According to EqualOcean’s estimation, the real ratio falls into the range between 3.2 and 3.8.
Augmented reality wearables producer Magic Leap has the second lowest (after Global Switch) VF ratio in the batch – 2.43. Receiving USD 2.6 billion in 7 rounds of financing, the Florida-based firm is among the leaders by the number of investment events. Geek+, which develops robots for warehouses and factories, has a slightly higher VF ratio – 2.57. Mobile devices manufacturer Royole Corporation is trailing with the figure of 2.73.
Bitmain and Samsara Networks are forging ahead with VF ratios of 15.69 and 15.65 respectively. World-famous drone-maker DJI, being valuated at over 95 times funding, leads the list. This is the only sky-high number in the cohort, so we may conclude that investors in hardware are more down-to-earth. Although most of the subindustry verticals in the sector are knowledge-intensive, capital makes the lion’s share of input. And capital is easier to be calculated.
A bright future?
The recent several years might be called the era of software as many new retail, fintech, SaaS and other enterprises have quickly evolved into companies of significant size, increasing their global influence. These players used to have a spacious room to develop their businesses as technology improvement spurred the markets. Since then, markets have gotten saturated, and the game is different now. Connectivity trends, cloud computing, 5G, IIoT and other soon-to-be-vital concepts shape the imminent era of hardware.
According to Crunchbase, there are 65 quasi-unicorns – companies that have raised over USD 100 million – worldwide, as of August 15, 2019. EqualOcean expects the “Hardware Blessing” of the Global Unicorn Club to expand drastically over the next decade due to a handful of reasons: