The ‘unicorn glut’ theory of startup misery

Unicorns, Tiger and bear markets! Oh my!

Unicorn traffic jam meet unicorn glut.

Private-market tech companies worth $1 billion or more have long been an indicator of investor enthusiasm. The number of so-called unicorns minted in a particular period was a workable indicator of how hot the venture capital market was at the time.

For example, the pace at which new unicorns were born grew sharply in 2020, per CB Insights data, rising from 25 new $1 billion startups in the first quarter of that year to 47 by Q4. Then, the rate of unicorn births multiplied, reaching 115 in Q1 2021 and peaking at 146 in the second quarter of the same year. Since then the number has slowly fallen, reaching 113 in the first quarter of 2022. It could drop into the double digits in Q2.

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The raw number of new unicorns is only a part of the dataset that matters. Venture capitalist and SaaS influencer Jason Lemkin recently noted on Twitter that the “vast majority of [venture capital investment] went into unicorns and decacorns the past [two] years” and not earlier-stage companies. This means that the boom in venture capital totals was, to some degree, a unicorn bonanza.

The same CB Insights dataset makes clear just how much venture capital unicorns grazed last year. In 2020, for example, some $140.5 billion was raised in 633 nine-figure rounds — those of $100 million or more, a loose comp for venture deals that went to billion-dollar companies.

In 2021, those numbers soared to $366.6 billion from 1,569 nine-figure deals. The portion of venture capital dollars invested globally that went to deals worth $100 million or more rose from a little under 50% in 2020 to nearly 60% in 2021.

(When we discuss 2021 mega-rounds, we cannot fail to mention the rapid-fire pace at which Tiger Global put funds to work in later-stage startups. That said, the firm was not alone in its temporary exuberance.)

While the unicorn venture market is slowing — CB Insights says that 51% of Q1 2022 venture capital went to nine-figure rounds, or $73.6 billion in 364 deals — the largest deals to the most valuable startups cleaned up in recent years, and even more so as the venture capital market reached a peak last year.

This helped form the unicorn glut. What’s that? Lemkin describes it as a “massive overhang of growth investments that will take startups years to grow into.” The problem, Lemkin continued in a thread, is that many of the largest 2021 deals will take another three years or more to “grow into their valuations,” which “may slow down growth investment for years to come.”