Decacorn

What is a decacorn?

Decacorn refers to an unlisted, venture-capital-financed company that is valued at at least USD 10 billion in a financing round. Venture capital is equity capital that specialised investors provide to young, fast-growing companies (startups) in return for shares. The valuation results from the price that new investors pay for part of the company. Anyone who pays USD 500 million for 5% values the whole company at USD 10 billion in arithmetic terms.

The name combines the Greek prefix “deca” (ten) with the English word unicorn. A unicorn is an unlisted company with a valuation of USD 1 billion or more; the mythical creature stands for the rarity of such companies. The decacorn lies a factor of ten above that, and from USD 100 billion the term hectocorn (from “hecto”, hundred) is occasionally used. Because the terms come from the US market, the threshold is stated in US dollars for European companies too.

Decacorn is a market term from the media and investor communications, not a legal or accounting term. The threshold refers to the post-money valuation of the last financing round, that is, the price per share of that round multiplied by all shares after the round. Companies of this size finance themselves in late growth rounds. Growth funds, sovereign wealth funds, family offices (asset managers of wealthy families) and funds that invest in both private and listed companies (crossover funds) take part. The terms are set out in participation agreements and shareholders' agreements whose complexity comes close to capital market transactions.

How the valuation of a decacorn comes about

The stated valuation is not a market price but the result of a negotiation over a comparatively small number of new shares. It follows from the price that the investors of the last round pay per share and is applied arithmetically to all shares. The shares of these investors, however, generally carry preferential rights. These include a liquidation preference, which secures them their investment first in a sale, and anti-dilution protection for the case of a later round at a lower price. Shares without these preferential rights (common shares), which founders usually hold, are therefore worth less than the valuation per share suggests. The same applies to virtual shares of employees, whose value is tied to common shares.

High valuations also set the expectations for the next round. A later round at a lower price per share (down round) triggers agreed protective rights (anti-dilution protection) and shifts shares at the expense of the shareholders without this protection. If existing shares are sold, this is not infrequently done at a discount to the price of the last round, because these shares lack the preferential rights or the buyers assess the valuation risk differently.

Growth model and capital requirement

A valuation of this size presupposes a very large addressable market, as a rule across several countries. In addition there is a business model that becomes cheaper or more valuable as it grows, for example through network effects, platform structures or high switching costs for customers. Companies on this path put growth and market leadership ahead of profitability for years and need several large financing rounds for this.

The term therefore says more about the financing model than about enterprise value. A decacorn has taken on a very large amount of equity. Its investors earn their return only through a very large exit, that is, a sale or IPO in which they dispose of their shares. The counter-model is formed by capital-efficient growth companies (camel) and companies that pursue profit and social benefit with equal priority (zebra).

Exit, liquidity and control

For companies of this size, only a few buyers come into consideration. An acquisition by a competitor is regularly subject to merger control, that is, the review of business combinations by the competition authorities. The obvious route to liquidity is therefore the IPO (initial public offering). Shares in a GmbH (German limited liability company) cannot be traded on a stock exchange. Before an IPO, the company is therefore converted into a legal form that can be listed, for example by a change of legal form into a stock corporation (Aktiengesellschaft) under the German Transformation Act (Umwandlungsgesetz), or placed under a holding company that can be listed.

Until then, such companies often stay private for many years. Founders, early investors and employees receive liquidity through sales of existing shares to new investors (secondary sale). In a GmbH, every transfer of shares requires notarial certification and often consent under the articles of association. Employees in Germany mostly hold virtual participations. They benefit before an exit only if the participation plan provides for payouts even without an exit, for example in an organised sale round for existing shares.

After many rounds, founders often hold only a small part of the capital. In the US market, they commonly secure their influence through share classes with multiple voting rights. In a German GmbH, the articles of association can regulate voting rights differently from the capital participation (voting rights). For the stock corporation, the German Stock Corporation Act (Aktiengesetz), since the Future Financing Act (Zukunftsfinanzierungsgesetz), permits multiple-voting shares again within narrow limits: at most ten votes per share and, after an IPO, only for a limited period. In return, investors usually demand consent requirements and information rights.

Worked example: decacorn valuation and liquidation preference

In the last round, investors pay USD 800 million for 8% of the shares and receive a simple, non-participating liquidation preference. This means that in a sale they receive either their investment back first or their share of the proceeds, whichever is higher, but not both. For simplicity it is assumed that only this round holds a senior preference.

• Valuation: USD 800 million / 8% = USD 10 billion post-money; the company thus counts as a decacorn
• Sale at USD 6 billion: proportionally, the last round would be entitled to 8% × USD 6 billion = USD 480 million
• The preference instead secures it USD 800 million; for the other shareholders with 92% in total, 6,000 million minus 800 million = USD 5,200 million remains
• Proportionally, the other shareholders would be entitled to 92% × 6,000 million = USD 5,520 million; they therefore receive USD 320 million less, 5,200 / 6,000 ≈ 86.7% of the proceeds instead of 92%
• Threshold: at proceeds of exactly USD 800 million / 8% = USD 10 billion, preference and proportionate participation give the same amount; only above that is proportionate participation more favourable for the last round

Below the valuation of the last round, the holders of common shares therefore receive less than their share suggests. If there are further preferences from earlier rounds, the gap widens. The label decacorn describes the price of the latest preferred shares, not the value of every share.

Distinction: decacorn, unicorn and hectocorn

• Unicorn: unlisted company with a valuation of USD 1 billion or more. The decacorn lies a factor of ten above it.
• Hectocorn: term for valuations of USD 100 billion or more. It is rare and likewise not legally defined.
• Business valuation: determines the value of a company methodically, for example via capitalised earnings, discounted cash flow or comparable multiples. The decacorn threshold, by contrast, is tied to the negotiated price of a financing round.
• Camel and zebra: describe growth models with lower capital requirements or an equal-ranking social purpose, not a valuation threshold.

Common mistakes

• Valuation equated with the value of common shares. Founders and employees estimate their stake by the price of the last round, although preferences and anti-dilution protection reduce their proceeds at a lower sale price.
• Valuation as a goal instead of a consequence. A high valuation on unfavourable terms makes the next round harder and can lead to a down round with triggered anti-dilution protection.
• Cost base aligned with capital instead of demand. If hiring after a large round is faster than revenue grows, the cash runway shortens despite large funds.
• Exit routes overestimated. At this size, a sale is possible only to a few buyers and can fail at merger control. An IPO depends on the state of the capital market.
• Employee participation not adjusted. Anyone who joins late at a high valuation can expect little value gain with virtual shares with a high base price. Without adjustment, the programme loses its retention effect.

Frequently asked questions

From what valuation does a company count as a decacorn?

From a valuation of USD 10 billion in a financing round, as long as the company is not listed. In practice, the post-money valuation of the last round is decisive.

Is decacorn a legal or accounting term?

No. The term has no basis in company, capital market or accounting law. In the annual financial statements, equity appears with the amounts paid in and reserves, not with the valuation of the last round.

Are decacorns profitable?

Not necessarily. Many companies reach this valuation with high growth and continuing losses. Investors in later rounds therefore look for a reliable path to profitability and for unit economics as the company grows.

Does a company lose the label if its valuation falls?

As a rule, yes. The label is tied to the latest valuation of an unlisted company. If a new round is closed below USD 10 billion, the company no longer counts as a decacorn. The label also lapses with an IPO, because the market capitalisation then takes the place of the round valuation.

Are there decacorns in Germany?

Yes, occasionally. Only very few German growth companies have reached a valuation of USD 10 billion or more in a financing round. The legal form does not matter here; a GmbH can also be a decacorn. Before an IPO, however, such a company has to change to a legal form that can be listed or be placed under a corresponding holding company.

The Roemer Capital view

Valuations of this size lie far above what companies reach in the Series A to C rounds that Roemer Capital accompanies, with round sizes of up to EUR 100 million. The mechanism behind them nonetheless appears in every round: a high valuation is worth only as much as the terms on which it is agreed. Roemer Capital therefore does not calculate offers only by the price per share. In a waterfall analysis, the distribution of proceeds among all shareholders, it shows founders for several sale values what reaches them.

For the next round it matters that the valuation is backed by revenue, growth and unit economics. A valuation that the company cannot reach in the follow-on round shifts negotiating power to the investors. Roemer Capital therefore advises a valuation that the plan still supports even in the cautious case.