Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
As investors struggle to price the stock market as economic and political news continues to break, the private market is entering a rough period. It seems increasingly likely that the period of disruption due to COVID-19 will persist for months, if not quarters. That means missed Q1 and Q2 revenue growth, bookings, and the like from startups domestically and around the world.
And that’s the bullish case. For some cohorts of startups, the outlook is even worse. Think about travel startups, ride-hailing upstarts, and any grouping of private companies that pursued a high-burn, high-growth model; that final category is about to run into the twin issues of the inflexibility of cost structure and the impact of slowing sales. That alone would make fundraising more difficult; toss in a deflating stock market and possible recession, and the mixture is a downright mess.
But we owe it to ourselves to survey what is going on in an attempt to answer our own questions about IPOs, exits, unicorn tallies, and who might be in trouble. Unlike when things were less bad, there will be no laughing this morning and no jokes. Just notes on what’s going wrong and what it might mean for private companies.
Damage
Let’s start with the most mature companies and work our way backwards. That means we’ll start today by thinking about the companies that have already filed to go public, the firms that have told investors — both public and private alike — that they are ready to graduate.
Procore and Accolade, for instance, have filed publicly to debut but have yet to price and pull the trigger on their offering. Since then, no new filings with more recent financial data can be found, meaning that the companies are weeks away from going public. That means no more venture-backed IPOs in Q1 as Accolade and Procore were the furthest along.
One major conduit for unicorn liquidity is now closed for the quarter, leaving investors with just two venture-backed companies (from our world, that is) having gone public: Casper (which went poorly) and One Medical (which went very well). But two is not the magic number even if both had gone perfectly, given the hundreds of unicorns that still need an exit.
Some companies are closer than others. Asana and DoorDash and Postmates have all filed privately to go public (here, here, and here), but given the insane repricing of their comps on the public markets, no public filings appear to be in the offing. After all, SaaS is down, tarnishing Asana’s possible public valuation; Uber and Lyft have also repriced in recent weeks, harming DoorDash and Postmates’ hopes for winning debuts, at least for now.
For the huge unicorn cohort somewhere between achieving a $1 billion valuation and going public, the future is more murky. I’m speaking to growth investors on the matter, but it appears that a few things will happen:
- Some deals will fail; many deals will slow; and growth itself will likely dip.
- A global move to temporary remote work will disrupt some operations.
- Investors probably become more wary of high-growth companies than they already were, coveting firms that appear more durable than flashy.
- Inside rounds may become more common.
- Valuations fall as public comps are slashed, this means avoiding downrounds is going to be new thing to do.
It’s all pretty bad, frankly.
When I asked in December how many unicorns would exit before the market turned, here was the state of affairs in numerical terms, regarding the number of unicorns that needed an exit:
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.
The most recent numbers? 443 current unicorns, 118 exited via an IPO, and 55 acquired, per the Crunchbase-TechCrunch unicorn leaderboard, through Q4 2019. Those numbers rose a bit early in 2020, but will do for now.
Nearly 450 unicorns, then, globally, need an exit and are now staring down the markets that just cut SaaS stocks by 35%. Sure, not all unicorns are SaaS, but a lot of them are, and its seeing its worth cut daily by public investors. And with no IPOs, paired with big companies probably more focused on keeping their operations afloat than buying smaller firms, acquisition numbers are going to be a hot mess for some time.
As noted up top, certain sectors are seeing concentrated damage. Travel startups are under fire (more here on Airbnb), companies that sell to or depend on the food services industries are probably struggling as well. Supply chains are still disrupted for some, and surely not every unicorn has a product that does well in this crisis.
So things are bad for most unicorns, worse for many, and probably lethal for some.
I’m struggling to find a good note to end on, other than to say that it’s likely that the companies that do make it through this period will come out the other side more disciplined and more efficient. That’s good, and it will make for an eventual IPO boom that will be a delight to write about. Today, however, the storm clouds are still gathering, so it’s time for hatch battening and sail curtailing. You can match our sailing analogies to startups cutting operating expenses and trimming growth plans, if you’d like.
Regardless, it’s choppy out there, and for unicorns that need an exit or a check, probably scary as well.
