On Unicorns
The term “unicorn” to describe startups may be losing its meaning a little bit, but not because of the number of companies reaching that level.
Is the term unicorn losing its meaning?
The first reason the term “unicorn” may hold less weight now than when the term was coined a decade ago is the value of $1 billion. With inflation, one dollar in 2023 has the same buying power as $0.78 in 2013. So, if not adjusting for inflation, it's perhaps a little easier for a company in 2023 to get a $1 billion valuation than it was in 2013.
The other thing to consider is that the rapid investment activity by venture capitalists in the last few years has sparked a large number of unicorns. In, 2020 American start ups raised on average $428 million per day. Some of these venture capitalists invested in competitors in the same industry to hedge their bets. Tiger Global led a funding round of investing $155 million in Patreon in April 2021, and $550 million into Kajabi in May 2021 – both creator economy technology platforms that compete for the same customer base. The flurry of activity from venture capitalists around these companies has greatly increased their numbers, but it doesn't mean that the companies themselves that reach unicorn status today are less impactful, disruptive, or innovative as the unicorns of five or ten years ago.
Pros and cons to going public
I might be hesitant to IPO if I was the founder of a unicorn, because being a public company requires operating very differently from being a privately held company. I saw this first hand when I worked for one Houzz. In 2017, Houzz's $400 million series E fundraising round got them a $4 billion valuation.
So, what are the pros to going public? Well, Houzz leadership imparted to us that going public was not an end goal, but a mechanism, to continually gain more money to continue growing the business. Another pro is realistically, it can increase the personal wealth position of the early investors and the workers (if they are shareholders) that helped to create the company to what it is. Once a company is public as well, they can use stock options or grants as way to compensate their employees and become a more attractive company to work for, and retain employees due to the nature of the stock vesting schedule.
But there are a lot of cons as well. As far back as 2018 or 2019, I saw the process of Houzz beginning to get ready to eventually go public (which has still not happened, to the lament of my RSUs). This involved a lot of change for the company to ensure that their systems were sufficient to operate like a public company that needs to follow regulations and do financial reporting. This involved hiring a couple of key roles, preparing for audit processes, and then, of course, improving many things within the product/service. This took a lot of work over the years that so far has not materialized. Hopefully, one day it will, but regardless of whether it does or not, it took time and energy away from other things that could have grown the business even more or fixed some of the internal issues that drove attrition, including my own. It also means sharing your company’s performance financials broadly, which some founders see as a con.
Is there a unicorn bubble?
Though there are now 1,200 unicorns around the world as of July 2023, I don't believe that the continuing growth of global unicorn startups is causing a new market bubble.
The valuation of a company really only means something to the broader market if the company ever has an exit – either an acquisition or a public offering.
Statista and Crunchbase report that from 2006 to November 2022, there have been 422 unicorns with an exit – 273 with an IPO and 149 with a merger or acquisition. So, the majority of unicorns continue to stay privately held.
For the companies that have not yet exited, many are not really in a position to do so. In May 2022, TechCrunch reported that only one of six unicorns that the time were “true IPO candidates” (Wilhelm, 2022). They reported that Bessemer estimated that only one in six unicorns had reached $100 million in annual recurring revenue which is considered a benchmark for IPO readiness.
So, if five out of every six unicorns is not ready to go public, and an acquisition is an even less likely exit, then I would predict most unicorns will stay privately held companies. Some of these will continue to operate successfully, while others may eventually close or exit. Of course, the funding round investors could sell off their stakes in the private company, and the valuation would impact them at that time, but that’s such a small group I don’t think it would dramatically shift the market.
In summary, there may be a bubble between the valuation and actual worth of these companies. But, for perhaps the majority of unicorns, the unicorn valuation is nothing more than a PR accolade and would have no farther-reaching impacts where the market would experience the negative impacts of a bubble.
Unicorns impacting the competitive landscape
But, what I do think is happening is that it feels like there's less of a competitive landscape. With the rise of so many unicorns it seems as if there are one to three key players in each space and if you're not one of those, your company doesn't really have a chance at even modest success. For example, if a potential founder has an idea to improve upon the software or services created by a unicorn, even if the potential competitor is better, there is so much market share and brand awareness and consumer trust in the well-known unicorn product that potential competitors may not even try to enter the space and compete. The number and concentration of unicorns could be stifling competition, which could lead to a monopoly situation. If we ever do have a situation where we have true monopolies on various products or services, at that point, I believe we would have a bubble.
References
(2023, July 31). The Complete List Of Unicorn Companies. CB Insights. Retrieved August 5, 2023, from https://www.cbinsights.com/research-unicorn-companies
(n.d.). CPI Inflation Calculator. U.S. Bureau of Labor Statistics. Retrieved August 5, 2023, from https://www.bls.gov/data/inflation_calculator.htm
(2021, May 4). Kajabi Raises $550 Million and Garners Valuation Over $2 Billion with Growth Financing Led by Tiger Global. PR Newswire. Retrieved August 5, 2023, from https://www.prnewswire.com/news-releases/kajabi-raises-550-million-and-garners-valuation-over-2-billion-with-growth-financing-led-by-tiger-global-301282851.html
Matney, L. (2021, April 7). Patreon triples valuation to $4 billion in new raise. TechCrunch. Retrieved August 5, 2023, from https://techcrunch.com/2021/04/06/patreon-triples-valuation-to-4-billion/
(2022, December 31). Number of unicorn exits worldwide from 2006 to November 2022, by exit type. Statista. Retrieved August 5, 2023, from https://www.statista.com/statistics/1095176/number-of-unicorns-exits-globally-by-year-of-exit-by-exit-type/
Wilhelm, A. (2021, January 20). Fintech startups and unicorns had a stellar Q4 2020. TechCrunch. Retrieved August 5, 2023, from https://techcrunch.com/2021/01/20/fintech-startups-and-unicorns-had-a-stellar-q4-2020/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKb_bZEERYcmmu_jrgMLRzenneKhV2RpBRkQEldmflFnXdpWsW4fqXqEzGyntAg_fBDIicUuyYc513K
Wilhelm, A. (2022, May 17). Only 1 in 6 unicorns are true IPO candidates today. TechCrunch. Retrieved August 5, 2023, from https://techcrunch.com/2022/05/17/only-1-in-6-unicorns-are-true-ipo-candidates-today/