Ten years ago today, Cowboy Ventures’ Aileen Lee penned a column for TechCrunch that brought the term “unicorn” into the world.
Defined at the time as “U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors,” the term has since expanded to encompass all private startups valued at $1 billion or more.
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Lee’s column helped the world categorize startups in a new way, but it was also a sign of the times to come, as the world soon saw a massive acceleration in the number of billion-dollar startups rooted in global technology entrepreneurial hubs. In a 2015 follow-up to her column, Lee noted that since her original column, her team found a “jaw-dropping 115% increase” in the number of unicorns worth a total of “$327 billion – 2.4x our last analysis,” discounting Facebook for obvious reasons.
No matter how you count them, Lee had defined the scale of startup success that was required to make increasingly large venture capital funds’ math work out 10 years ago, and that threshold became relatively easy to cross.
With 5 new unicorns in first week of 2021, are we in for a stampede this year?
Then the markets changed. We all know how the global venture capital market has changed since 2021, so there’s no need to go over that again, but the new landscape has special meaning for unicorns.
At one point, it was not uncommon to hear that a startup had structured their latest venture round to ensure a $1 billion valuation. Why would they do that? I heard that it was easier to hire if your tech company had achieved a big-kid valuation. People respond to incentives, after all, and companies are made of people.
It’s easy to forget just how quickly the “unicorn” tag became a hot commodity. In her 2015 article, Lee wrote that “from some, there’s even concern now that pursuit of ‘unicornhood’ is both annoying and may have somehow changed the nature of tech valuations.” Again, incentives change behavior. Now that they had a fancy “club” to join that would likely get journalists to write about their company, you can see why executives vied to reach the ten-figure valuation mark.
The market is different today. Unicorns are once again rare and late-stage capital is scarcer than it was a few years ago. It’s worth digesting how big this change has been: Just 12 unicorns were “born” in the third quarter of 2023, per CB Insights, the “lowest quarterly level since 2016.”
This failure of new unicorns to form at prior rates is potentially an issue for venture capitalists. Lee’s notes on why such companies are needed for venture math to work are still pertinent:
Why do investors seem to care about “billion-dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns. For example — to return just the initial capital of a $400 million venture fund, that might mean needing to own 20% of two different $1 billion companies, or 20% of a $2 billion company when the company is acquired or goes public.
A $400 million venture capital fund? How provincial. Currently, venture giant a16z is looking to compile a $3.4 billion collection of funds in one go, and that won’t even be the largest pool of capital it has put together to date. Greylock just announced a $1 billion fund, and Venom Foundation put together a $1 billion web3-focused fund earlier in 2023. Hell, we haven’t even mentioned SoftBank’s two Vision Funds yet.
In short, if unicorns were critical for making $400-million VC funds work, the stakes are far higher today given how large VC vehicles have become. Private-market investors need more unicorn exits than ever to make VC returns attractive compared to other forms of investment, especially in these high-interest-rate days.
The problem here has two facets.
First, as we noted above, unicorn formation has slowed to a comparative crawl, even if it remains comfortably above the pace that Cowboy Ventures initially noted back in 2013.
Second, unicorn exits remain abysmally uncommon, and such companies have historically gone public at a much slower rate than they were being created for a very long time. In 2021, startup exits soared and it appeared that the tables were turning, but all that ended and now we’re back to a massive, multi-trillion-dollar backlog.
Which leads us to the two questions we want answers to: Just how many of the current “unicorns” are still worth $1 billion? And will they be able to find a way to return cash to their backers before the heat death of the universe?
Today, on the 10th birthday of the unicorn moniker, we’ve almost come full circle. From a handful of billion-dollar startups to a stampede to an aging cohort — what an insane, fun, and wild decade it has been.
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