Unicorns are Dying

Unicorns are Dying

There are three possible leads this week. ChatGPT's ongoing success and Microsoft's acknowledgment of a very large investment; The ongoing issue of social media, in particular, the return of "the former guy" to Facebook; or the continuing impact of the public market decline on private company valuations and on venture capital.

I vote for the latter. Social media is tiring and over-discussed. The former guy is increasingly irrelevant. So private company valuations and venture capital it is.

I make no excuses for stealing this week's headline from an interpretation of articles written by Gené Tear at Crunchbase News, and Kyle Harrison from . Unicorn valuations on the Block and Thinning the Herd are two of my essays of the week.

First Kyle:

For many of these companies, the biggest reality that they will have to face is that for most of these companies, any valuation mark from 2020 - 2021 aren't just one of many data points. They're irrelevant data points.

In the words of Bill Gurley, "forget those prices happened."

And Gené:

Of the 1,433 companies on the board, more than 1,100 - or 78% - had their valuations set in the past two years. Those companies with new valuations represent almost three quarters of the entire board's total value.

Keep in mind, our Unicorn Board reflects disclosed valuations tied to a priced funding event - not other valuations, such as those set in an internal event via a 409a valuation, or when investors revalue their portfolios via writedowns. (That's why, for example, the board still lists Stripe's valuation at $95 billion, although the payments company has reportedly reset its internal valuation to $63 billion - the third time in fewer than 12 months it has trimmed its valuation.)

The implication is clear. Many of the companies described as unicorns are not. And many venture funds that invested in them will mark down their investments if they haven't already.

It also seems clear that new unicorn production will slow significantly. That will take two forms. First, it will take longer for companies to travel from early-stage rounds to later stages. Second, as they move from Series A to Series B, C, and D, the valuations will reflect the new reality where a 10x valuation measured from annual revenue will be rare.

Most likely, as the IPO market freezes over, later-stage investors will not show up as often or with as much capital. Exits will be rare.

In this market environment, a premium will be placed on a venture fund being able to find the best growth companies early. Access to the companies will become super competitive. Returns will be highly sought after. And liquidity will be valued more highly than paper multiples.

I met an LP this week who had decided not to re-up in many very prized venture funds. The complaint was that he can't bank MOIC or TVPI. He only values DPI. In other words cash, liquidity, not paper gains.

The well-documented "dry powder" in the venture ecosystem may be a short-lived reality.

of course, where there is pain, there also is gain. Last week we covered Blackstone raising a $25bn secondary fund focused on buying distressed assets with good prospects. One person's distress is another person's opportunity. And this week we cover SaaStr's article stating that seed investing will flourish, even though A-E rounds will struggle.

One thing is for sure - nothing remains the same.