Unicorn Start-ups, Is this the Peak?

A ‘unicorn start-up’ is?a private company funded by investors, usually VCs, with a valuation over US$1 billion.

The phrase was coined in November 2013 by Aileen Lee, founder of Cowboy Ventures, who published her now-famous post about private company unicorns referring to US$1B+ valuations.

By August 2022 1,170 unicorn companies are listed by CB Insights (this list misses some Chinese and Indian unicorn start-ups).

Important to note the valuation is based on investors (usually VC’s) selecting the number and agreeing on a valuation. This is all ‘in-house’ between the start-up and investors, neither are independent or impartial.

There is no external review or external investors such as stock markets, nor is their any external data available, apart from well-timed leaks. ?

Is this a bubble, is a fair question?

DRAMATIC GROWTH

At the end of 2013, there were?43 unicorns?(private cos valued at US$1B+).

By October 2015, there were 141.

By November 2020 the ‘unicorn club’ passed 500 for the first time.

Since November 2020 671 Unicorns have been created by VC investors with 90% not making any profits.?

Unicorn growth has been startling as this chart shows.

TOP 12 UNICORNS

The largest Unicorn is ByteDance at US$140 billion – or TikTok.?

ByteDance was founded in 2012 by Zhang Yiming, and Liang Rubo and developed the video-sharing social networking services and apps TikTok and Chinese-specific counterpart Douyin. The company is also the developer of the news and information platform Toutiao ("Headlines"), raising $9.4 billion in 12 rounds to date.?

?VALUATIONS UNDER PRESSURE

Unicorns’ risk/rewards dramatically increased following the ‘Covid’ stay at home era aided by excessive valuations, total lack of profits, ‘free’ central bank money, government stimulus, exuberant VC’s/Private Equity and run away share markets.

All of this is looking very shaky as ‘free’ money is withdrawn by central banks and interest rates must ramp up quickly to curb runaway inflation.

Early in 2021 stock markets starting warning that risk would not be rewarded, and Unicorns needing to make profits, not fancy charts of ‘future growth’ and massive cash burn. The declines gathered pace in 2022 as public Tech stocks were smashed.

A comparison of IPOs vs S&P 500 shows the pressure is on.

?KLARNA’s PROBLEM IS EVERY UNICORNS

Number 5 on CB Insights unicorn list, Klarna was ‘valued' at US$45.6 billion.

Europe’s highest valued private Fintech told media it was seeking a next round US$50--60 billion in late 2021.

Global BNPL leader Klarna, still unprofitable needed US$1 billion due to high cash burn, so had gone back to investors.?

The ‘new’ round cost Klarna US$39 billion (plus 10% staff cuts) and a valuation US6.7 billion, a decline of 85% which is broadly in-line with global BNPL stock which are down 92%.

Klarna is now 100th on CB Insight list, a crushing blow – but not the last to see dramatic drops in valuations.

TOP 12 DECLINES

Five of the top 12 Unicorns have had their valuation revised –

SHEIN – down to US$75 billion

Stripe – down US$74 billion

Klarna - down to US$6.7 billion

Canva – down to US$26 billion

Instacart – down to US$24 billion

NuBank IPO in December 2021, so no longer on the list, market cap is US20 billion a 55% or $25 billion decline for VC valuation. NuBank is the largest neo bank by far, so puts the spot light on all the other valuations.

Five of the top ten Unicorns have lost US$125 billion in valuation or 17% of the top groups value – if this is applied across the whole category over half of all Unicorns would disappear.

The T. Rowe Price Global Technology Fund cut Stripe to $23.04 a share as of June 30, a 64% reduction from the end of last year - reporting by Bloomberg.

SoftBank one of the more aggressive investors in Unicorns lost over US$50 billion in 6 months, its CEO recently criticized founding CEO’s for not revaluating their companies (some might say this is a bit rich) as they should, given market conditions.

CEO/founders appear reluctant to revalue downwards for a number of reasons – one the biggest is the drastic cuts required to internal ESOP share values, which many key staff have as part of packages, or in some cases have given up cash wages to gain even more shares – a huge risk.

This type of ‘financial engineering’ is more akin to balance sheet pilfering than sound management.

FINTECH UNICORNS ARE EXPOSE

The 234 Fintech’s on CB Insight list range in size:

9 are over US$10 billion valuation,

23 are $5-10 billion,

73 are $2-5 billion,

72 are $1-2 billion and

57 are $1 billion.

129 or 55% Fintech Unicorns are $1-2 billion in value, a 10-20% reduction in valuations would see most of these drop off the Unicorn list.

In 2021 the top six Fintechs dominated the category –

Stripe had a valuation of US$95 billion in 2021, now US$74 billion

Klarna US$46 billion, now US$6.7 billion (blue arrow shows prior position)

NuBank US$45 billion, now US$20 billion (blue arrow shows prior position)

Revolut US$33 billion unchanged but should be $8-10 billion

Chime US$25 billion, unchanged but should be $6-8 billion

FTX US$20 billion, unchanged and probably now worth $2-3 billion

PayTM US$20 billion, IPO in India stock down 50%