A Glut of Private Unicorns

Within the US, there are currently 656 privately-held, venture-backed companies valued at over $1 billion dollars¹ .

Over the last 10 years there has been, on average²  

• 6 venture-backed companies that IPO with a valuation of over $1 billion each year

• 24 venture-backed companies that are acquired for over $1 billion each year

Investors have been calling a massive right-sizing of valuations for some time. Brad Gerstner of Altimeter Capital stated that 30–40% of companies valued above $1bn “do not have product market fit [and] will disappear”, while the “lion’s share of companies” will see their valuations marked down by at least 50%. Others claim the shutdown rate can hit as high as 70%.

But the wave of repricing has not been a public armageddon. After record-level cash raises in 2020 and 2021, companies have slashed operating expenses and extended runway to 5+ years. If the market is big enough, several newer entrants can sustain multiple years of 20+% revenue growth. Yet, if those same companies raised at 50X ARR, they will have to replicate that +20% growth for 10 years just to be flat with their current valuation (assuming at 10X exit multiple). 

Continued investment comes down to a belief in the tail-end of those 10 year projections. While everyone intuitively understands that rapid growth over a long period of time is exceptionally rare, we are also notoriously bad at forecasting more than a few years into the future. A company showing prior-year growth of +100% is trying to demonstrate that the half-life of that growth rate will be modest. Founders, board members and downstream investors are all still having those discussions privately.

In the mean-time, down-rounds across venture capital remain elevated and very few deals are getting done at Series E+. High profile shutdowns like Convoy and Hopin indicate how little the sunk cost fallacy is affecting late-stage investors’ calculus. Many would prefer to get back 40 cents on the dollar, free up time, and founder / employee talent to back in another venture.

IPO markets have also become more discerning. Investors are demanding more scale and a clear path to profitability. The wide-spread value destruction of 2021 IPOs is a powerful example of how public market buyers have re-evaluated what type of companies deserve to be listed.

Venture investors continue to discuss portfolio companies that are “IPO-ready” once markets open back up. Many companies have struck a better balance between growth and profitability and bolstered their C-suite team to get them there. Yet most of the VC-backed IPOs of 2023 were preceded by considerable down-rounds (Instacart, Klarna, etc) so it is important to assess whether that IPO candidate has taken sufficient “medicine” in private markets or is in the top XX% of private companies that is already outperforming public market peers on all metrics (including profitability). 

In short, there is a lot of blood-letting that still needs to happen.

1  Source: CB Insights as of April 2024

2  Source: Pitchbook as of April 2024