Unicorn companies, which are privately held startups valued at $1 billion or more, are facing challenges as overcrowding and a funding drought take their toll. These once highly sought-after companies have seen their valuations plunge due to over-valuation and a lack of lucrative exits for venture capital (VC) backers. The high number of unicorns, which has grown from 44 a decade ago to 1,350 this year, has led to increased competition for capital and limited opportunities for IPOs and acquisitions.
Coatue Management, a technology-oriented investment firm, estimates that the total valuation of venture capital-backed unicorns has been cut in half to $2.5 trillion. The inability to go public or attract buyers has made it difficult for unicorn companies to raise new funding from skeptical investors. Co-founder of Coatue, Philippe Laffont, believes that there are too many unicorns requiring too much capital, leading to a devaluation of these once-promising startups.
Several unicorns have experienced significant drops in valuation recently. For example, Instacart, an online grocery delivery service, is down 69%, while Stripe, an online payment processor, is off 47%. Chinese fashion retailer Shein has also fallen 34%. Despite these reduced valuations, these companies still qualify as unicorns based on their self-reported valuations.
Coatue evaluates unicorn valuations by comparing them to similar companies that have gone public in recent years. One such example is DoorDash, a competitor to Instacart, which went public in December 2020. Since its peak in November 2021, DoorDash’s stock price has dropped by 63.5%. These valuation reductions can be attributed to various factors, including the push for antitrust enforcement against large tech companies by the Biden administration and a credit contraction following the collapse of Silicon Valley Bank.
The decline in funding for startups has been reflected in the venture capital industry’s struggle to raise funds and support early-stage investments. Last quarter was the worst for venture capital and early-stage investing in five years, according to S&P Global Market Intelligence, with funding across North America being cut in half. The VC industry has become bloated with unsustainable levels of investment during the boom cycle, leading to a lack of available funds for fledgling companies.
While some unicorns, such as OpenAI and SpaceX, remain highly valued and well-positioned for a successful IPO, many others are grappling with the challenges of a crowded market and limited funding opportunities. As the landscape for unicorn companies changes, their enchantment and magical allure seem to be fading, leaving them grounded and struggling to find their way forward in the financial realm.
