A unicorn company is a privately held startup company valued at over $1 billion. The term was first popularized by venture capitalist Aileen Lee in 2013, who chose the mythical animal to represent the statistical rarity of such a successful venture. Out of the hundreds of startups that reach Series A funding, only a very small fraction eventually reach $1 billion valuations. According to Lee’s analysis, only 0.07% of all venture-backed companies ever reach unicorn status.
The extremely high valuations of unicorn companies are often based on their high growth potential, significant traction, and large user bases. They need to demonstrate the ability to rapidly scale up and dominate an industry. Most unicorns receive pre-IPO valuations based on private funding rounds before eventually pursuing initial public offerings. Some of the most well-known unicorn companies include Uber, Airbnb, Palantir, and SpaceX. Reaching unicorn status validates a startup’s business model and future prospects, putting them on the map as an emerging giant within their sector.
This article will analyze whether the social media platform TikTok has the key ingredients to potentially become a unicorn startup.
TikTok’s Growth
TikTok has seen exceptional growth in its userbase over the past few years, particularly in the US market. According to Backlinko, TikTok now has over 1 billion monthly active users globally as of December 2022. In the US, TikTok’s monthly active users have grown from about 27 million in October 2018 to over 100 million as of 2022.
This rapid expansion of TikTok’s userbase, especially in the US, demonstrates the app’s incredible popularity and ability to attract and retain users. Several factors have contributed to TikTok’s growth, including its algorithm that provides a personalized “For You” feed, its simple interface focused on short videos, and influencer marketing. As more people join the platform, it also benefits from network effects – current users encourage their friends and family to sign up.
With over a third of US internet users now on TikTok, its domestic growth has been truly staggering. The app’s continued expansion speaks to its mainstream appeal and the addictive nature of its short video content.
TikTok’s Valuation
TikTok has seen tremendous growth in valuation over the past few years. In 2018, ByteDance acquired Musical.ly for $1 billion to merge it with TikTok (https://www.businessofapps.com/data/tik-tok-statistics/). Just two years later in 2020, TikTok was valued at $50 billion by investors (https://www.businessofapps.com/data/tik-tok-statistics/).
This massive increase reflects the rapid adoption of TikTok by users around the world. In 2021, TikTok was one of the most downloaded apps globally across both iOS and Android devices. The app’s monthly active users surpassed 1 billion in September 2021.
TikTok’s growth has attracted significant interest from investors and acquirers. In 2020, Microsoft entered talks to acquire TikTok’s US operations for as much as $30 billion. More recently in 2021, ByteDance rejected a $50 billion acquisition offer from Oracle.
While an IPO may still be a few years away, TikTok is clearly demonstrating substantial value as a social media platform, especially among younger demographics. Its continued growth could drive valuations even higher in the future.
TikTok’s Revenue
TikTok generates revenue primarily through advertising. According to BusinessofApps, TikTok generated $9.4 billion in annual revenue in 2022, up from just $3.7 billion in 2021. The bulk of this revenue comes from in-feed native ads, brand takeovers, and branded effects.
TikTok’s ad revenue is projected to grow rapidly in the coming years. FourWeekMBA estimates TikTok will generate $11 billion in revenue in 2023. Meanwhile, Linearity reports that TikTok’s ad revenues could hit $18 billion in 2023, representing 55% year-over-year growth. This growth is being fueled by TikTok’s massive user base and high engagement levels.
TikTok also generates some revenue through its Creator Fund, where it shares ad revenue with top creators. However, advertising remains the primary revenue driver for TikTok.
TikTok’s Profitability
Despite TikTok’s massive user growth and revenue, there has been much debate around whether the platform is actually profitable yet. According to recent reports, TikTok’s parent company ByteDance generated a net profit of $3 billion in 2022. While a sizable profit, this represents only about a 3% profit margin on TikTok’s estimated $100 billion in revenue. Given the app’s high operating costs for content moderation and infrastructure, some analysts believe TikTok is still likely operating at a loss globally.
However, TikTok has disputed these claims and stated that they are indeed profitable on an operational basis in some established markets like the US, UK, France and Germany where monetization is more mature. The app generates revenue primarily through advertising and virtual goods sales. While TikTok is still investing heavily in growth in emerging markets, their route to profitability is becoming clearer as their advertising business scales up. But the jury is still out on whether the super fast-growing platform that has taken the world by storm is sustainably profitable yet.
Network Effects
One of the key factors driving TikTok’s rapid growth is the powerful network effects inherent in the platform’s design. As defined by Erica D’Arcangelo in her article on Twitter, TikTok, and Network Effects in Marketing, network effects refer to how individual user contributions on a platform collectively add up to create a better overall experience. The more people who join a platform like TikTok, the more entertaining and useful it becomes.
TikTok’s algorithmically driven For You page amplifies these network effects by showing each user a customized feed of engaging videos. As users engage with content, the algorithm learns their preferences and shows them more of what they like. This creates a positive feedback loop where viral videos spread rapidly through the network. As reported by NPR, TikTok and Twitter both benefit greatly from these viral network effects which make the platforms hard to displace.
According to analysis by Neemz, TikTok’s design encourages creativity and leverages network effects to make creating and discovering entertaining short videos intuitive and addictive. The combination of TikTok’s algorithm and network effects leads to viral growth as users are incentivized to create content that spreads across the platform.
Competitive Landscape
TikTok faces strong competition from major social media platforms like Instagram and YouTube that have launched short-form video features.
Instagram Reels poses a significant threat as it allows users to create 15-second multi-clip videos with audio, effects and creative tools. With over 1 billion monthly active users, Instagram has the reach and resources to draw users away from TikTok (1).
YouTube Shorts is another top competitor, allowing users to create 60-second vertical videos designed for mobile consumption. With YouTube’s brand recognition and 2.5 billion monthly logged-in users, Shorts has the potential to take share in the short-form video market (2).
Smaller apps like Triller, Byte and Dubsmash offer similar short video formats but have much smaller user bases compared to TikTok’s over 1 billion monthly active users (3). While these apps aren’t as threatening in their current state, they represent examples of easy-to-replicate short-form video features.
Overall, TikTok faces rising competition from major platforms adding short-form video capabilities. However, its early leadership in this space and massive user base put it in a strong market position for now.
(1) https://fourweekmba.com/tiktok-competitors/
(2) https://influencermarketinghub.com/tiktok-alternatives/
(3) https://www.imyfone.com/make-video/tiktok-competitors/
Regulatory Issues
TikTok has faced growing regulatory scrutiny over privacy, security, and censorship concerns. Authorities in multiple countries have raised alarms about how user data is collected and handled by TikTok and its parent company ByteDance.
In the United States, government agencies like the Federal Trade Commission have investigated TikTok for potentially violating children’s privacy laws and mishandling user data. There are also concerns around potential ties to the Chinese government and fears TikTok could be compelled to support Chinese censorship and surveillance objectives.
In response, TikTok has sought to improve its data security protections, limit data access to its Chinese parent company, and increase transparency around its content moderation policies. However, regulatory pressures persist, with some countries like India even temporarily banning TikTok over security issues. Resolving these regulatory challenges will be critical for TikTok to maintain trust and continue growing globally.
TikTok’s Potential
Early indications are that TikTok has potential to continue its rapid growth. According to Social Media Examiner, only 32% of marketers planned to use TikTok for marketing in 2021, suggesting there is still significant room for increased adoption by businesses 1. Power Digital Marketing reports that TikTok is expected to reach over 1.2 billion monthly active users in 2022, reflecting massive growth projections 2. With strong engagement among Gen Z users and increasing interest from brands, TikTok seems poised for ongoing expansion.
However, some challenges remain. Regulatory scrutiny in markets like the US and India could hamper growth if restrictions or bans are imposed. Competition from rivals like Instagram Reels and YouTube Shorts may also limit TikTok’s rise, though its early lead gives it an advantage. Ultimately, TikTok’s full potential will depend on its ability to maintain viral growth, retain users, and prove its value to advertisers over the long term.
Conclusion
In summary, TikTok has experienced meteoric growth and has a massive valuation, but it is still unclear if it can be considered a unicorn. While TikTok’s revenue and profits are harder to quantify given ByteDance’s private status, there are signs that TikTok has the potential to be highly profitable. However, TikTok faces challenges around network effects, competition, and regulations that could impact its long-term viability. While TikTok exhibits some of the hallmarks of a unicorn, such as rapid growth and a unique value proposition, there are still open questions around its profitability and ability to sustain market dominance. More time is likely needed to see if TikTok can truly join the ranks of unicorns or whether it will remain a viral phenomenon with an uncertain future.
