How many unicorns will exit before the market turns?

Hello and welcome back to our regular morning look at private companies, public markets and the grey space in between.

Today we’re digging into unicorns: how many will find an exit through an acquisition (selling themselves to a larger company) or an IPO (starting to trade as a public company) before the market turns?

When the business cycle does eventually turn ill, it’s generally expected that private capital will become scarcer, something that could harm yet-unprofitable unicorns. In turn, backers of private companies worth at least $1 billion could see the value of their investments decline or implode. The number of unicorns that manage to exit before a market turn is, therefore, something to keep an eye on.

This is doubly true as the number of un-exited unicorns continues to rise. Despite unicorn IPOs and acquisitions (more on that in a moment), the number of private companies worth $1 billion (unicorns that need an eventual exit to return capital to their backers who expect eventual, profitable liquidity) has risen each quarter for years now.

This has led to hundreds of unexited unicorns worth more than $1 trillion in total, according to the Crunchbase leaderboard. That’s a lot of corporate value to shift before the business cycle heads negative, possibly closing the IPO window and bringing winter to the sort of private finance that unicorns have long depended on.

Scale

In Q3 of 2017, there were 250 unexited unicorns according to the leaderboard, 39 unicorns that had gone public and 24 more that had been acquired. A year later those numbers rose to 307 unexited unicorns, 79 unicorns that had gone public and 40 more that had been sold.

In its most recent update for Q3 2019, the same dataset indicates that there are 400 unexited unicorns, 112 that have gone public and 50 that have been sold.

Doing the math, in Q3 2017 80 percent of unicorns were still private and independent (unexited). In Q3 2018, that improved to 72 percent. And, at the end of Q3 2019, the percent improved modestly to a little over 71 percent.

We can see, then, that the portion of unicorns that have managed to find an exit has improved over the last few years. Less encouraging, however, is that the raw number of unicorns still in hunt of an exit has grown by leaps and bounds.

In chart form, it looks like this:

The bet that investors are making on late-stage, high-growth companies — the sort of startup that unicorns tend to be — is growing in size as time goes along. You can also phrase the point by noting that as the market pushes later into an economic expansion that has already lasted an unusually long time, it is making larger and larger bets that it keeps going.

Depending on your personal risk profile, that either makes good sense or it doesn’t. But as the above chart shows, it’s happening.

Winter

Winter is on my mind for more reasons than merely the frigid climate that the East Coast is currently enduring; I can’t stop thinking about startup winter.

Imagine if private capital slowed by, say, 50 percent due to a decline in the NASDAQ or other public indices. What portion of the unicorn cohort could cut its way to profitability, or something near it? As we recently saw from the OneConnect IPO, some unicorns are still miles from making money, and many would die without external help.

Some would make it, but not all. That means that a percentage of the blue bars in our chart will expire if they can’t exit before the market turns. Winter will prove lethal to the less winsome unicorns.

But looking ahead it’s hard to forecast a huge upturn in the number of unicorn exits. Looking at the “Global IPO trends: Q4 2019” from EY makes this point clear. From the report, the following bullet point concerning the Americas (bolding: original):

US exchanges accounted for the majority of IPOs in the Americas, 77% by deal numbers and 93% by proceeds in 2019. This included 24 unicorn IPOs.

According to EY, global IPO volume fell by around 19 percent this year. But turn that around and assume that double the number of companies go public next year. That would be 48 unicorn IPOs in the Americas. Double it for the world and we can wave our hands at around 100 unicorn IPOs next year in our sunny scenario

That would probably be enough to slow, if not stop, the growth in unexited unicorns (as more will be minted in 2020). But I doubt it would manage to begin reducing the number of total unexited unicorns. And there’s no reason to think that unicorn IPOs will double in number next year.

Wrapping, this is a head-scratcher. I don’t get what the plan is for all these unprofitable, expensive companies that aren’t heading for the exits while they are still open. Email me (alex.wilhelm@techcrunch.com) if you understand what is going on.

More on this when we get the Q4 2019 numbers.