Investors are no longer minting nearly two unicorns per day. In fact, we’re down to barely more than one new mythical horned horse per week.
Welcome to the new venture normal, where it seems stories of previously well-funded startups imploding will be more common than news of mega-rounds.
Tracking the global venture slowdown is a twofold task: First, you have to monitor the slowing flow of venture dollars into startups, and second, it involves watching valuations contract as pre- and post-money valuations wilt under stricter investing conditions.
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Declining valuations at tech companies big and small and the dearth of capital are together creating a parched startup landscape. From falling early-stage valuations to late-stage investment and valuations being decimated, it’s tough out there for startups.
PitchBook data concerning new unicorns underscores how bad things are now: A measly 18 unicorns were minted in Q1 2023, compared to 163 new unicorns in both Q3 and Q4 2021.
The last time we saw the rate of new unicorns that low was back in Q3 2017.
To put this into clearer context, the first quarter of 2023 saw new unicorns being created at a pace only fractionally better than the average quarterly rate in 2016. You know, the final year of the second Obama administration.
A different era, in other words.
How did we get here? Late-stage rounds got smaller but it wasn’t only that. Investors finally realized just how incorrectly they were pricing late-stage value creation during the recent venture peak.
A recent cut of data from Carta indicated that median Series D valuations on its platform have fallen to about $243 million this year from just over $1 billion in Q3 2021. Series E+ valuations have taken an even greater tumble in both absolute and percentage terms:
I imagine it’s hard to build a unicorn when you’re given fewer legos to snap together and the bricks keep getting smaller and smaller. But how tough is it to actually build a unicorn today?
Yesterday, we spent a good chunk of time thinking about the premium that startups have commanded over public companies in recent years, and how it has probably been too high for some time and remains so even today. Another way to think about startup value creation is to take public market figures and run them backward. Elad Gil did that in February, but let’s repeat the experiment with today’s data:
- On the public markets today, software companies have an average revenue multiple of 6.6x, predicated on strong gross margins and an average growth rate of 25.9%, according to venture firm Bessemer.
- This means a late-stage startup growing at 26% per year would need around $151.5 million in total revenue to go public at a $1 billion valuation.
- Let’s presume this startup is growing faster. That lets us give it a 10x revenue multiple, placing it at or near the peak figures we see amongst public tech companies. A unicorn still has to generate revenue of $100 million and grow that top line at probably more than $3 million per month to earn a $1 billion valuation.
Those figures were, well, different two years ago. You could reach a billion-dollar valuation with far less revenue in the recent past. Recall that Notion raised capital at a $10 billion ($10,0000 million) valuation back in October 2021, which was nearly the peak of the venture market. The company had been valued at $2 billion in mid-2020. Today, we’d expect Notion to have annual recurring revenue of more than $1 billion at a 10x multiple to support that price tag. Or really super-duper fast growth on a modestly smaller revenue base.
Anyone taking that bet?
Fewer unicorns are being minted today because it’s once again become really difficult to earn a billion-dollar valuation. As for the unicorns of the past, many of those are mostly just horses LARPing today. Get the glue factory ready.
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