By Aileen Lee - edited by Clay Chandler

Aileen Lee is founder of Cowboy Ventures, a seed-stage fund that backs entrepreneurs reinventing work and personal life through software. Previously, she joined Kleiner, Perkins, Caufield & Byers (KPCB) in 1999 and was the founding CEO of digital media company RMG Networks, backed by KPCB.

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What are the odds of investing in a startup that will achieve a “billion-dollar exit”?

Recently, as a strategic exercise, we asked ourselves: How hard is it for startups to reach that threshold? And what does it take to get there?

For us, posing those questions isn’t idle conjecture. Historically, top venture funds have reaped their greatest returns from owning stakes in just a handful of companies out of a portfolio of many, many ventures. A few big winners can make up for an awful lot of little duds. And as traditional venture funds have gotten bigger, they need bigger “exits” to deliver acceptable returns. For example, just to return its initial capital, a $400 million venture fund might need a 20 percent stake in a company that’s worth $2 billion when it’s acquired or goes public.

It has been more than four decades since the Boston Consulting Group introduced the famous “growth-share matrix” that encouraged companies to categorize their investments as “cash cows,” “dogs,” “question marks” and “stars.” But startups that become billion-dollar giants aren’t innumerable like stars. They’re rare, elusive and a little magical. So we called them “unicorns.”

And we wondered: How hard is it to find one of these unusual creatures? Is there anything investors can learn from the mega-hits of the past decade, like Facebook, LinkedIn and Workday?

To come up with some answers, we built a dataset of U.S.-based software companies launched since January 2003 and most recently valued at $1 billion by private or public markets. Our dataset has some limitations: 1) it’s based on publicly available sources, such as CrunchBase, LinkedIn, and Wikipedia; and 2) it captures only a brief interval—like a few frames from an ongoing movie where the picture is changing all the time. But our research yielded some fascinating conclusions:

LESS THAN ONE PERCENT

Our big discovery was that unicorns are even scarcer than we thought. Of the approximate 60,000 U.S. software and internet companies launched since 2003, we identified only 39 that achieved a billion-dollar-plus exit. That’s just .07 percent of all venture-backed consumer and enterprise software startups. The lesson: spotting a startup that will be worth more than a billion someday is really hard. Forget what you read in the tech news. In reality, the odds of creating a unicorn or investing in one are somewhere between those of catching a foul ball at a major league baseball game and being struck by lightening. Put differently, finding a unicorn is more than 100 times harder than getting accepted to Stanford.

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Click on the image for a larger version

SUPER-UNICORNS

Our data highlighted the fact that there is a huge difference between mere Unicorns and what we call “super-unicorns”—companies that achieve an exit value of more than $100 billion. In the decade covered in our data set, there has been one Super Unicorn, Facebook, and it towers over the rest of the herd with a market capitalization of almost half of the $260 billion aggregate value of all companies on our list. The 38 unicorns other than Facebook were worth an average of $3.6 billion.

Looking back over the last 50 years, we came to the broad conclusion that major waves of technology innovation have come roughly every ten years, and that each wave has given birth to one to three “super-unicorns.” The 1960s, the decade of the semiconductor, gave us Intel. The 1970s saw the birth of the personal computer and gave us Apple, Microsoft and Oracle; the 1980s marked the beginning to the networked world, and spawned Cisco; in the 1990s, with the dawn of the modern Internet, came Google; and finally, in the 2000s, new social networks gave rise to Facebook. Super-unicorns are ultra rare, but as this list suggests, these are companies that make all the difference—that transform the world and, at the very least, change your life if you are lucky enough to work for or invest in them.

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Click on the image for a larger version

THE SEVEN-YEAR ITCH

A third finding was that, on average, it took more than seven years for new ventures to achieve a “liquidity event.” The exceptions to this rule were YouTube and Instagram, both of which were acquired for over $1 billion within two years of launch. (Fourteen of the companies on our list were still private). Those two examples notwithstanding, the key point for employees and investors is that the journey from startup to vesting can be long and nerve-wracking one.

SOME OF OUR OTHER CONCLUSIONS:

— Consumer-oriented unicorns have been more plentiful and created more value in aggregate, even excluding Facebook.

— Enterprise-oriented unicorns have become worth more on average, and raised much less private capital, delivering a higher return on private investment.

— Companies fall somewhat evenly into four major business models: consumer e-commerce, consumer audience, software-as-a-service, and enterprise software.

— Unicorns founded by inexperienced twenty-somethings are outliers not the norm. Again, Facebook, whose founders were in their 20s, is the exception. Most unicorns in our data set—including LinkedIn and Workday—were launched by well-educated co-founders in their 30s. Many of these firms were managed by teams of founders with a long history of working together.

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Click on the image for a larger version

— Nearly 80 percent of unicorns had at least one co-founder who had previously founded a company of some sort. Some founders showed their entrepreneurial DNA as early as junior high.

— Unicorns that start with one product then make a “big pivot” to another product are the exception, not the rule.

— San Francisco (not “the Valley”) now reigns as the home of unicorns.

— Most founding CEOs scale their companies for the long run. An impressive 76 percent of founding CEOs led their companies to a liquidity event, and 69 percent are still CEO of their company. About a third of the unicorns we examined did make a CEO change along the way.

— Unicorn founders are a pretty homogeneous bunch. Only two companies have female co-founders: Gilt Groupe and Fab, both consumer e-commerce. And no unicorns have female founding CEOs.

— The majority of founding CEOs, and 90 percent of enterprise CEOs have technical degrees from college. More than two-thirds of the ventures on our list had at least one co-founder who graduated from a “top 10 school.” Stanford leads the roster with an impressive one-third of the companies having at least one Stanford grad as a co-founder. Former Harvard students are co-founders in eight of 39 unicorns; Berkeley in five; and MIT grads in four of the 39 companies. Eight companies had a college dropout as a co-founder. And three out of five of the most valuable companies (Facebook, Twitter and ServiceNow) on our list were or are led by college dropouts, although dropouts with tech-company experience—the exception, again, being Mark Zuckerberg at Facebook.

WHO’S NEXT?

So, what does this all mean?

For those aspiring to found, work at, or invest in future unicorns, it means anything is possible. Technically, all these companies are outliers—the top .07 percent of all software firms. As such, we don’t think this provides a unicorn-hunting investor checklist, i.e. 34-year-old male ex-PayPal-ers with Stanford degrees, one who founded a software startup in junior high, where should we sign?

Still, it surprised us how much members of the Unicorn Club have in common. In some cases, 90 percent of members had things in common. For example: enterprise founder/CEOs with technical degrees; companies with 2 or more co-founders who worked or went to school together; companies whose founders had prior tech startup experience; and whose founders were in their 30s or older.

It is worth remembering that most successful startups take a long time and an enormous level of commitment to break out. While vesting periods are usually four years, the most valuable startups will take at least eight years before a “liquidity event,” and most founders and CEOs will stay in their companies beyond such an event. Unicorns also tend to raise a lot of capital over time—way beyond the Series A. So these founding teams had the ability to share a compelling company vision over many years and rounds of fundraising, plus scale themselves and recruit teams, despite economic ups and downs.

We tip our hats to these 39 companies that have delighted millions of customers with fantastic products and generated so much value in just 10 years despite a crowded startup environment. We look forward to meeting those who will break into this elite group next.

This essay is adapted from a post that appeared originally on TechCrunch.com.