Not Everything that Glitters is Gold: The Fall of the Unicorns and the New Focus of VC in 2023

I recently wrote a (quite successful) post, discussing one of the 10 Big Ideas that will shape 2023: Goodbye Unicorns? Investment funds will bet on sturdy horses. I decided to dive in deeper and share my thoughts on the subject.

In recent years, the term "unicorn" has been used to refer to privately-held startups with a valuation of over $1 billion. However, the COVID-19 pandemic and the resulting economic downturn have caused many unicorns to struggle, leading to a shift in the way venture capitalists (VCs) view high-risk investments. According to CB Insights, the number of unicorn companies worldwide fell from 638 in Q1 2020 to 587 in Q4 2020. In 2020, the median valuation of a unicorn company was $2.3 billion, down from $2.9 billion in 2019. It seems that the unicorns have lost their magical powers, at least in the eyes of investors.

I find that when talking about startup valuations, people use a lot of jibber-jabber. So to clarify, the valuation of a startup is an estimate of the company's worth, and it is determined through negotiations between the founders and investors. Because the valuation is based on estimates of the company's future performance and potential, it is subjective. Different people may have different opinions on the potential of the company and what it is worth.

It's like the saying goes: all that glitters is not gold (or in this case, worth $1 billion)

In some cases, both the VCs and the founders may be motivated to achieve unicorn status, regardless of whether the company is truly worth that much. This led to a bubble in the startup market, which burst in 2022 as it became clear that some unicorns were overvalued. It's like the saying goes: all that glitters is not gold (or in this case, worth $1 billion).

The current economic climate, along with the volatility of the markets, has further impacted the value of unicorns. In addition, the lack of resilience shown by many scaleups during the crisis has caused investors to reevaluate their investment strategies. A study by the National Bureau of Economic Research found that the median return for VC-backed startups was -70% between 2004 and 2010. This may have contributed to a shift in focus from "growth at all costs" to profitability and healthy unit economics. It seems that VCs have realized that you can't have a sustainable business if you're losing money.

A survey conducted by Deloitte in 2020 found that only 44% of startup founders believed that their company would achieve profitability within the next year, down from 70% in 2019. This trend is reflected in the priorities of VCs as well. According to a survey by the National Venture Capital Association, the top priorities for VCs in 2021 are revenue growth, profitability, and unit economics. It's a bit of a departure from the "unicorns or bust" mentality of the past.

So... if it's not Unicorns, what are VCs looking for now?

We can call them Zebras, Camels, Horses, but that doesn't matter. Investors are shifting their focus from rapid growth at any cost to profitability and healthy unit economics. This shift in focus means that startups are no longer being evaluated solely based on metrics such as active users, number of nights reserved, or number of trips traveled. Instead, financial metrics and unit economics, which help to understand the true cost and value of acquiring and retaining customers are being used to understand the true cost and value of acquiring and retaining customers.

So if you're a founder, I suggest you revisit your Key performance indicators (KPIs) and take a look on metrics such as customer acquisition cost (CAC), customer lifetime value (CLTV), revenue per employee, revenue growth rate, and gross margin. It might be time to say goodbye to the wild west of "growth at all costs" and hello to the more stable, financially savvy approach of prioritizing profitability. Your bank account (and investors) will thank you.

As I always say: failure is the greatest opportunity to learn.

This shift in focus is one of the Big Ideas that we believe will shape 2023, as investors look for more sustainable and profitable investments. We may be saying goodbye to the unicorns, but hello to businesses that can actually turn a profit. While it is important to recognize that failure is a natural part of innovation, I hope that both founders and VCs have learned from the fall of the unicorns and will make more informed decisions in the future. Let's hope that the next big thing isn't a mythical creature that's doomed to fail.

As I always say... failure is the greatest opportunity to learn.

Here's a fun disclaimer. In writing this article, I enlisted the help of an AI system to assist with research and organization. I simply fed this post written by me and asked the system to add hard facts and turn it into an article.

How cool is that?