It’s a rote story by now that many populations around the world are facing rapid decline. Birth rates in many countries are falling, leading to concerns about graying populations engendering imbalanced economies.
That’s true when we consider nation-level populations. It’s also true when we consider the rate at which new unicorns are born, measured by the pace at which global startups reach the $1 billion valuation threshold. Once rare, unicorns became far more pedestrian during the 2020-2021 peak of the last venture capital cycle. What’s old is new again — we’re seeing unicorn formation slow.
And rapidly. Per Crunchbase data, the rate at which unicorns are being born has fallen nearly 80% from its peak, which was notably reached one year ago.
From a trickle to a rush to a trickle
That unicorn formation is slowing should not surprise; after all, we’ve seen a deceleration in the pace at which prime unicorn rounds were disbursed. With mega-rounds slowing, it makes sense that fewer startups are able to raise new funding that pushes their valuation above the $1 billion mark.
But even though we knew to look for a slowdown, the pace is a surprise. Here’s the data, per a recent Crunchbase News report (we’ve highlighted Q3 for each year, and the sequentially preceding quarter as well):
- Q1 2020: 23
- Q2 2020: 37
- Q3 2020: 45
- Q4 2020: 68
- Q1 2021: 137
- Q2 2021: 158
- Q3 2021: 165
- Q4 2021: 153
- Q1 2022: 140
- Q2 2022: 103
- Q3 2022: 37
There’s really no way to spin the numbers in a positive sense that we can see. Unicorn formation is down sharply on a sequential-quarterly basis and even more year over year. Even if we exclude the outlier year 2021 entirely, comparison to Q3 2020 doesn’t help.
Is it bad news that unicorn formation is abating? Perhaps not as much as you might think.
It is bad news that we’re seeing a slower pace of value creation among global startups; if you want to see more money flow into, through and then back into the startup market, you’d want to see a quick pace of unicorn formation and exit.
But the bad-news vibe is tempered by the fact that exit velocity in 2022 for startups is stalled. M&A has helped ease the pain of a frozen IPO market, but liquidity is in short supply, and no one is more jammed up by that fact than late-stage startups. As unicorns are late stage by definition, the more unicorns that are formed, the more pressure builds up at the closed exits of the startup market.
Perhaps that pressure will rise slower if the pace at which unicorns are formed also diminishes? That stands to reason and is fair to note as we’ve long compared the pace at which unicorns were born against their graduation rate — and fretted about the imbalance. More balance must therefore be good.
The backlog continues to grow, however. With 37 new unicorns in Q3 2022, we still minted several per week during the quarter, a rate of formation that is far and away greater than the pace we saw private-market unicorns either sell (Figma!) or go public ($_entry_missing). So the problems of the past are with us.
What will the mass of unexited unicorns do if the IPO market doesn’t open up in 2023? Or valuations don’t recover somewhat for tech companies? Or both‽ Beats the hell out of us. We joked that unicorns should have gone public back when valuations were bonkers, and some did. But mostly it appears that unicorns are famous not for their once-rare valuation mark but because of their amazing reticence to act like other companies of similar worth outside their sector.
Perhaps the never-ending Peter Pan state of the modern startup unicorn (they never want to grow up!) will lead to simply fabulous real wealth creation after a long run of paper gains. But investors seem to be betting that things got a bit out of hand, and lower prices for startups make more sense. Which means that their last round of bets — those made last year when the unicorn printing machine was running at full speed — were perhaps poor wagers.
If that bears out, perhaps instead of waiting for unicorn IPOs, we should be waiting for the knackerman instead.