In this "View From The Field," we deep-dive into one of our ten venture predictions as outlined in our 2023 Outlook Report.

2023 Prediction #3: Net Unicorn growth will turn negative for the first time

Coined in 2013 by venture capitalist Aileen Lee, the term “Unicorn” in the VC world refers to a private company valued at or over $1 billion —just like the mythical creature, the statistical rarity of such a successful business venture was improbable but once achieved highly coveted. Back then there were only 29 unicorns in the U.S. and being deemed a unicorn was a term of prestige – a signal to the world that a startup had made it to the big leagues. Today that number has grown to over 1,200 companies globally, and terms like decacorn and hectocorn are displacing the once mighty unicorn.

The number of new unicorns declined 80% from 251 in the first half of 2022 to the first half of 2023, as only 44 companies achieved this prestigious status. This stands in stark contrast to the 251 new unicorn status in the first half of 2022 and the 295 in the first half of 2021. So, what brought about this sudden fall in 2023? 

Changing Financial Environment: From Growth-at-Any-Cost to Profitability

During the boom period from late 2020 to 2022, a surge in venture activity was fueled by historically low-interest rates, which attracted an influx of non-traditional capital looking for short-term gains (in an asset class that is access constrained and comprised of long duration assets). This led to soaring valuations and mega investment rounds creating a number of net/new unicorn companies. Not surprisingly, as the Fed pulled the plug on ZIRP, the party ended (the punch bowl was empty) - investment activity slowed dramatically, the IPO window shut down, and non-traditional investors became net sellers. 

The days of funding “growth-at-any-cost” were over, and investors started taking a more cautious approach to deploying capital. The “P” word started popping its head up as profitability became the new mantra. 

Old principles like the “Rule of 40” - popularized by Brad Feld, started making their way back into venture capitalist’s checklists.² The rule states that for healthy SaaS companies, if the growth rate were to be added to their profit margin, the combined value should typically exceed 40 – underscoring the essential balance between aggressive growth and maintaining a healthy bottom line. Seems reasonable but was not something investors were focused on during the heydays of FOMO. And now, the high growth, unprofitable darlings of the past were being forced to rethink their strategy and focus on sustainability – cutting costs and improving operational efficiency. Was the industry becoming more disciplined?

Valuation Reassessment and Market Realignment

As a result, the falling number of new unicorns in 2023 can best be understood by examining the changes in valuation trends. Companies that secured substantial funding during the boom period are now being forced to optimize their operations and reduce their burn rates to stretch financial runways (but that comes at a cost – growth?). As a result, down rounds, exemplified by startups like Klarna, Instacart, and Stripe, have raised concerns around valuations and the bid/ask spreads in the secondary markets have widened dramatically. 

We’ve seen valuations compress across all sectors, though SaaS companies seem to have seen the largest impact. According to Bessemer Venture reports, SaaS valuation multiples have decreased by 75% year-over-year, meaning each dollar of ARR is valued at just a bit more than 25% of what it was a year ago.³ In Q4 2022, FinTech companies in the SEG Index recorded a median EV/Revenue multiple of 5.4x, which is less than half the 19x multiple during the peak (Q1 2021). 

This is putting a strain on many companies as they look to protect their “Unicorn” status (especially the most newly minted ones) and unfortunately, many will not be able to. According to Pitchbook data, currently about a quarter of global unicorns—337 companies—according to their last published funding round lie between the $1 billion to $1.2 billion valuation range putting them at risk of losing their unicorn status, potentially leading to net negative unicorn growth for the first time (ever) in 2023.⁴

The journey of unicorn startups has encountered a significant turning point in 2023, driven by evolving market dynamics, the imperative of profitability, and a redefinition of valuation paradigms. The once-coveted label of a unicorn no longer guarantees a privileged status as companies juggle with the challenge of simultaneously sustaining growth and achieving profitability. These factors underscore a new era in the startup landscape, wherein unicorns must navigate uncharted territories to retain their mythical allure and financial significance. Although challenged today, we think the unicorns of tomorrow will emerge to be stronger and more powerful than the ones of the past. 

All the best, 

John N. Ailanjian, CFA
General Partner

Caleagh Creech
Director, Direct Investments

Abhipriti Velamakanni
Investment Analyst, Direct Investments