A Glut of Unicorns and our Collective Delusion

There are currently 656 privately-held, venture-backed unicorns headquartered in the US (1).

Over the last 10 years there has been, on average:

• 6 venture-backed companies that IPO with a valuation of over $1 billion each year
• 24 venture-backed companies that are acquired for over $1 billion each year (2)

If these numbers hold up, it would take 21 years for public markets and acquirers to clear out the current glut of US unicorns.

Investors have been predicting a massive right-sizing of valuations for some time. Brad Gerstner of Altimeter Capital stated that 30–40% of companies valued above $1bn “do not have product market fit [and] will disappear”, while the “lion’s share of companies” will see their valuations marked down by at least 50%. Others claim the shutdown rate can hit as high as 70%.

But the wave of repricing has not been a public armageddon. After record-level cash raises in 2020 and 2021, companies have slashed operating expenses and extended runway to 5+ years. If the market is big enough, several newer entrants can sustain multiple years of 20+% revenue growth. Yet, if those same companies raised at 50X ARR, they will have to replicate that +20% growth for 10 years just to be flat with their current valuation (assuming a 10X exit multiple). 

Continued investment comes down to a belief in the tail-end of those 10 year projections. While everyone intuitively understands that rapid growth over a long period of time is exceptionally rare, we are also notoriously bad at forecasting more than a few years into the future. A company showing prior-year growth of +100% is trying to demonstrate that the half-life of that growth rate will be modest. Founders, board members and downstream investors are all still having those discussions privately. 

In the mean-time, down-rounds across venture capital remain elevated and very few deals are getting done at Series E+. High profile shutdowns like Convoy and Hopin indicate how little the sunk cost fallacy is affecting late-stage investors’ calculus. Many would prefer to get back 40 cents on the dollar, free up time, and founder / employee talent to back in another venture.

IPO markets have also become more discerning. Investors are demanding more scale and a clear path to profitability. The wide-spread value destruction of 2021 IPOs is a powerful example of how public market buyers have re-evaluated what type of companies deserve to be listed.

Venture investors continue to discuss portfolio companies that are “IPO-ready” once markets open back up. Many companies have struck a better balance between growth and profitability and bolstered their C-suite team to get them there. Yet most of the VC-backed IPOs of 2023 were preceded by considerable down-rounds (Instacart, Klarna, etc) so it is important to assess whether that IPO candidate has taken sufficient “medicine” in private markets or is in the top XX% of private companies that is already outperforming public market peers on all metrics (including profitability). 

In short, there is a lot of blood-letting that still needs to happen.

(1) Source: CB Insights as of April 2024

(2) Source: Pitchbook as of April 2024