There are more than 1,000 private companies with billion-dollar valuations backed by venture capital that need to go public. Fewer than one in six are IPO candidates, however.
Data from Bessemer Venture Partners’ State of the Cloud 2022 report breaks the unicorn market into two categories. (Notes here on TechCrunch+ from Bessemer partner Mary D’Onofrio.)
The first comprises unicorns that have reached the $100 million annual recurring revenue (ARR) threshold, which Bessemer dubs “centaurs.” The other group contains unicorns that have not yet reached that revenue marker.
Per Bessemer, the number of centaurs is growing over time — last year, we had 60 companies cresting the revenue benchmark, up from around 40 in 2020 and 35 in 2019. Those numbers may appear impressive, but when contrasted with the fact that more than 500 unicorns were minted last year, there is a yawning gap between companies valued as IPO-ready and those that actually are.
Doing some loose math, 60 companies reaching the $100 million threshold last year compared with 520 new unicorns works out to around 11.5%, or fewer than one in eight. However, Bessemer estimates that there are 150 private startups with $100 million in annual recurring revenue or similar, out of around 1,000 unicorns, meaning that around 15% of unicorns have met the mark — just under one in six.
(For reference, I am using $100 million as an IPO-ready revenue benchmark, which I don’t think will prove controversial, and $1 billion as a valuation indicative of public-market scale value, which, again, should not engender too much argument. More on both in a moment.)
How did we wind up with so many unicorns and so few IPO-ready private technology companies with IPO-scale valuations?
D’Onofrio explained in her column for this publication:
As investors rationalized a way to underwrite outcomes to 30x, 40x, 50x+ multiples, the once rare billion-dollar valuation became ordinary and inconsequential. As we highlighted in Bessemer’s 2021 Cloud 100 Benchmarks report, the average entry multiple for a top cloud company increased from 9x annual recurring revenue (ARR) in 2016 to 34x in 2021. This dynamic has led to this misperception on the size of unicorns.
Unicorns can be illusions, often appearing a lot bigger than they are in reality. At a 34x ARR multiple, a company only needs $29 million in ARR to achieve unicorn status. For a $29 million ARR company growing at 100%, a 34x ARR multiple also equates to a 45x current revenue multiple ($22 million of GAAP revenue with midyear booking).
Essentially, as investors paid more and more for early-stage revenues, the ARR requirement for unicorn status fell sharply. This led to the current imbalance between “centaurs” and mere unicorns, which can be nearly all storefront and no stock once you run an SKU check.
The $100 million ARR threshold
Bessemer is right to set the centaur bar at $100 million worth of ARR, saying that such companies are “elite” and “have product market-fit, scalable GTM, and a growing customer base.”
Why? Because if you sat down and doodled up a list of the things you would hope or expect to see in an IPO-ready company, you would want revenue scale ($100 million ARR, check); a product or service that matches customer demand (product-market fit, check); the ability to defend growth rates (scalable go-to-market motion, check); and an expanding set of customers that will drive net retention (growing customer base, check). Thus, the centaur denotation is a good way to separate the unicorn chaff from the IPO-ready wheat.
I will at this point note that TechCrunch+ kicked off a $100 million ARR series in late 2019 that ran for some time, eventually including some looks at $50 million ARR companies. The series was eventually bumped off a cliff because I got tired of writing it. I bring it up not to flex on fixating on one particular round number ahead of a venture firm, but instead because most of the early $100 million ARR Club companies that we profiled went public since we wrote about them. (We wrote in December of 2019: “Forget a $1 billion valuation — $100 million in annual recurring revenue is the cool kids’ club.”)
One of those companies was Monday.com, which TechCrunch+ covered earlier today. It’s a great example of how a centaur can become a public company, and one that has held onto a multibillion-dollar valuation even after its shares were repriced in today’s market.
In rifling through Monday’s earnings, it became clear that even SaaS companies growing at 100% post-IPO can wind up with ARR multiples as low as 10x, a figure that would have been considered a joke last year. Well, laugh as much as you want, but that’s where Monday is priced today, and it’s also precisely why the unicorn moniker has morphed from a useful and rare denotation of a super-hot startup to a punchline.
How so? Monday.com’s 10x ARR multiple means, when applied to private companies, that only centaurs are going to have a shot at defending a $1 billion valuation. After all, 10 multiplied by 100 is 1,000. And so a 10x multiple on $100 million worth of ARR gives us a $1 billion valuation. In effect, centaurs are the real unicorns, while most startups with the billion-dollar price tag are wearing a fake mustache to the Big Kid bar in hopes of being served without being found out.
Centaurs can go public as soon as the IPO window opens. Unicorns, though, could wind up nowhere.