Number Of $1B-On-Paper Startup Valuations Collapses As Investors Step Up Scrutiny, Leverage

Number Of $1B-On-Paper Startup Valuations Collapses As Investors Step Up Scrutiny, Leverage

startup valuations

Images: iStock / CBI Insights

Unicorns — startups with valuations of more than $1 billion — have struggled to sustain high valuations in 2022 after investments ballooned more than 100 percent in 2021 into tech startups. Recent market turbulence is making listing on the stock market a less attractive exit route for investors.

Inflation-induced high interest rates have caused many private investors to take a hard look at funding startups, some of which have never turned a profit. The recent pain in global equity markets and low listings have forced companies to raise funds at a substantial discount, known as a down round, relative to their sky-high valuations.

Companies that are looking for early-stage funding or seed money are also seeing their valuations questioned, Reuters reported.

Almost 340 new unicorn startups in 2021— close to one a day— raised money privately at valuations of $1 billion or more, more than triple the total from 2020, PitchBook data showed.

The U.S. IPO market has ground to a halt, with just eight companies pulling one off so far this year – a 13-year low, according to reports from the National Venture Capital Association (NVCA) and PitchBook.

The slowdown in new unicorns is putting pressure on the most valuable private companies, forcing valuations down and turning away investors in large, late-stage rounds, CBI Insights reported.

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As of July 2022, there were more than 1,100 unicorns around the world. About 60 percent of them were in the U.S. alone.

The U.S. and Asia have been most affected by the unicorn slowdown while Europe’s share of unicorns increased quarter-over-quarter in Q2 2022.

“Median valuations have fallen modestly across most investment stages, but there’s plenty of room for them to fall further,” CBI Insights reported. “The power balance is shifting from founders to investors, who now have more leverage to invest at cheaper prices or structure deals for more downside protection.”

The top 11 most valuable unicorns as of July 2022 include:

  • TikTok parent ByteDance (Valued at $140 million, China)
  • Elon Musk‘s Space X (Valued at $127 million, U.S.)
  • Online graphic design platform Canva (Valued at $40 million, Australia)
  • Grocery delivery firm Instacart (Valued at $39 million, U.S.)
  • Sam Bankman-Fried’s crypto exchange, FTX (Valued at $32 million, Bahamas)

As of April 2022, the world’s unicorns had an average valuation of about $3.5 billion.

“Investors basically need all these companies to be acquired or go public at valuations of $10 billion or more to make venture-like returns,” wrote Dharmesh Thakker, general partner at investment firm Battery Ventures and former managing director at Intel Capital, in a Forbes April 22, 2022 column.

Anyone want to guess how many $10 billion-plus U.S.-based public companies have been minted in the last decade? “Only 80 (as of April 8, 2022, according to CapIQ), including 26 software companies,” Thakker wrote. “That’s it – only 80!”

That value only matters when you exit, Thakker continued, pointing to two iconic unicorns whose founders had very different results.

Elon Musk raised large mega-rounds early in the company-building cycle and then spent those funds “wisely to build defensible franchises that lifted up thousands of employees economically along the way,” Thakker wrote. “The reverse is also true: WeWork raised, and later burned, billions from investors on the back of a real-estate business that masqueraded as a technology company, and ultimately destroyed equity value for many employees.”