Startups that were deemed worthy of a $1 billion valuation while still private were once so unusual, they seemed almost mythical — hence the “unicorn” moniker they were awarded. But when the COVID-19 pandemic started waning, venture capitalists started letting out all their pent-up energy, and capital and unicorns might as well have grown two horns, because they became as common as oxen.
We’re unsure if this is good news or not, but new data from Crunchbase indicates that unicorns are once again a rare occurrence.
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Only two new unicorns were minted in July, according to Crunchbase. That’s less than one every two weeks, and compared to the heady days of 2021, when some months saw more than 60 unicorns being minted — more than two per day — we’re now nearly close to zero. CB Insights data through June mirrors what Crunchbase reports, too.
This trend isn’t new, though. We dug into this very point back in the second quarter, noting that billion-dollar valuations are now frequently impractical for startups given how software revenue has been devalued in recent years. But there is a difference between unicorns being minted slower than they were in 2021 and just two new unicorns in a month.
What’s worse, there’s reason to expect we’ll see that number diminishing further.
Back when Aileen Lee coined the term “unicorn” on TechCrunch back in 2013, the investor wrote that her team had uncovered 39 U.S.-based unicorns. At the time, given the bounds of her dataset (2003 to 2013), that worked out to four new unicorns per year and up to three “super-unicorns” every decade.
That’s not a lot. Indeed, it makes July’s rate of two new unicorns a month seem quite high.
So, how much has the natural pace of unicorn creation changed since Lee’s piece back in 2013? Let’s find out.
Here’s a hypothesis: If the market can support more new unicorns every year than it could in 2013 (and have them go public in a reasonable time frame), we won’t have to worry about things going back to those levels. It wouldn’t make any economic sense given all the VC money flowing into tech startups.
Actually, I think that the technology industry is now capable of supporting more new unicorns and IPOs than it could in 2013, not to mention 2003. The market for the software and other tech that startups tend to produce has grown dramatically, and SaaS companies’ revenue multiples are much, much higher than what they could muster back in the day. No, the question is: Just how many more can the market handle?
A good way to answer that question is to ask another question: How many new startups will cross the $100 million annual recurring revenue mark every year? That threshold should prove a good proxy for the number of new unicorns the market can support, because private tech companies with run-rate revenue in the nine figures will likely be worth $1 billion or more when they exit, at least most of the time. We can feel pretty confident in that theory since M&A deals usually value companies at a premium, and a company with such startup-esque growth rates would warrant a billion dollars — even in this climate.
Startups with annual revenue of $100 million that are growing slower might be worth a little less, but with that large a revenue base, it won’t be too hard to get a ten-figure valuation. Notably, Bessemer Venture Partners terms startups that bring in $100 million in yearly revenue “Centaurs,” a unicorn-ish moniker that is perhaps what we should have used all along. When Lee wrote her article, revenue multiples did not allow small private companies to land unicorn valuations, and when that changed, unicorns became plentiful.
Private-market valuations are sticky since they arise from infrequent pricing events, so they can wind up as more of a historical artifact than an existing one. But revenue is more durable, and it is probably what we should have focused on the whole time.
We should forget the whole unicorn debate and rephrase our question: How many startups can reach the $100 million revenue mark for a given period? That should tell us how many truly outlying tech companies are being built and how much capital the venture market can likely put to work.