A billion dollars may seem like a big gamble, but unicorn status has for years helped young companies attract employees and media attention, as well as giving founders a track to pursue new ideas and prestige with partners. potentials. Many now-established startups like Airbnb and Uber, which have shaken up long-standing industries, relied on wealthy investors to cover losses as they struggled to compete.
But the BeReal experience is representative of a new reality in Silicon Valley.
As employee layoffs, CEO resignations and belt-tightenings wipe out some of the excessive profits tech companies are known for, investors here minted just 25 companies worth more than $1 billion. dollars each in the third quarter of 2022, according to venture capital research firm CB Insights. . A year ago, there were more than five times as many new unicorns.
The drop is a strong dose of rationality that is badly needed in an environment that prizes big promises and is prey to hype, investors said.
“It’s going to take a lot of founders out of the ecosystem who shouldn’t be doing it, people who are doing it for money and fame,” said venture capitalist Paige Craig, who has invested in companies like Twitter and Lyft.
But the shockwaves sweeping the tech sector could eventually dampen innovation and reduce competition in an industry already dominated by big tech companies including Apple, Google, Facebook and Amazon.
As interest rates rise and concerns about a global recession rattle the economy, tech companies big and small are scaling back hiring and cutting back on new investment. The CEO of Google has implored his workers to show “more hungry,” Y Thousands of start-up employees have lost their jobs in the last six months. Share prices of tech companies, which had risen steadily for the past decade, have finally plummeted back to earth. The Nasdaq 100, an index that represents the largest public tech companies, is down 30 percent this year.
Meanwhile, investors have yet to find the next big technological innovation to transform the way we live. In theory, unicorns represent the skyrocketing ideas that will help Silicon Valley land the next big thing, but cryptocurrencies, Web3, and virtual reality have yet to take off despite the billions funneled into them.
Once-prolific investors, including venture firm Andreessen Horowitz, which invested in BeReal’s first round of funding, have cut your investments. According to venture capital research firm PitchBook Data, the amount of venture capital funding going to late-stage startups fell nearly 50 percent in the third quarter compared to the second quarter. And some are preparing for a cultural shift from abundance to survival mode.
More than a decade ago, the $1 billion unicorn startup became an aspirational marker of success in Silicon Valley. It reflected the exuberance and optimism of an almost mythical bastion of the economy where boom times never seemed to end.
Investors agree to commit a certain number of funding dollars to a startup to help it get off the ground in exchange for a stake in the company, with the expectation that it will eventually go public or be acquired. The valuation is calculated by how much an investor pays for a share; for example, a 10 percent stake in $100 million would be worth a company at $1 billion. But that value is all on paper, and there’s no guarantee the company will ever be worth that amount.
The term “unicorn” was adopted in 2013 by venture capitalist Aileen Lee and was intended to denote the fact that a startup that crossed that threshold was extremely rare. No other concept so clearly embodied the magical thinking that fueled sky-high valuations that weren’t based on actual revenue or earnings, but simply on a company’s ability to keep growing.
The stock market was still struggling after the 2008 financial crash, with startup founders increasingly choosing to remain private rather than go public and accept big checks from venture capital firms that offered favorable terms without the volatility of share prices. trade.
“That’s what gave rise to unicorns,” said Sebastian Mallaby, the author of power lawa book about the rise of the venture capital industry.
Many of those companies never lived up to the spectacular expectations placed upon them. At one point, investors valued office-sharing company WeWork at $49 billion, but it is now publicly traded at less than $2 billion. Theranos blood testing company was valued at $10 billion at its peak. In January, a jury found its founder, Elizabeth Holmes, guilty of defrauding investors.
Still, the unicorn concept became enduring in Silicon Valley, with companies that could fetch big valuations attracting the best employees and investors.
Venture firms, which invest money in young companies in the hope of making big profits in the future, have historically made the biggest returns on only a few of the many companies they invest in.
A growth-at-all-costs mindset helped companies like Facebook, Google, and Amazon become the dominant companies they are today. For years, those companies were relatively unprofitable and reinvested their profits back into their businesses. But eventually, they became some of the most valuable companies in the world, turning the early investors who stuck with them into billionaires. (Amazon founder Jeff Bezos owns The Washington Post.)
The huge amounts of money that were made when companies went public attracted even bigger venture capital investors, including pension funds, sovereign wealth funds and private equity giants.
By 2021, unicorn companies were being created at a rate of more than two per business day, according to CB Insights, becoming almost commonplace.
But as governments raised interest rates this year to stave off inflation, big investors like pension funds and sovereign wealth funds abruptly exited the venture capital market to focus on less risky, long-term investments. said Kyle Stanford, senior analyst at PitchBook. Data.
“There is not enough capital to make investments that actually create unicorns,” Stanford said.
And as share prices of public companies fell, private markets followed.
BeReal did not respond to requests for comment. There are additional reasons why he may have raised capital at a lower rate, including that brands have struggled to use their service, or that TikTok and Instagram have copied the only function of the app.
Some existing unicorns have had to lay off employees, and others have been acquired in liquidations.
Brex, a financial technology company that raised money in January at a valuation of more than $12 billion, it laid off 11 percent of its staff this month. BlockFi, which had been valued at $4.5 billion, was acquired by FTX, another cryptocurrency company, for $240 million.
Bird, the e-scooter startup, was once valued at $2.85 billion as investors poured money into companies mimicking Uber’s model to revolutionize transportation. It went public last year and is now worth $89 million.
One of the biggest effects likely to affect consumers is an increase in prices.
Tech startups have long subsidized prices to help ensure faster growth. Even if they eventually raised prices, other startups with new money often came up with their own subsidized products as they struggled to make their way through crowded markets.
That dynamic may now be less common. Consumers accustomed to low rates on food delivery or free returns on direct-to-consumer cups and mattresses may see those options disappear.
There are exceptions to sadness. Artificial intelligence startups are attracting a lot of interest and funding, thanks to various technological advances in the field. Stability AI, which released software to the public that can create elaborate images from simple text prompts, raised more than $100 million at a $1 billion valuation according to news from Bloomberg.
WeWork founder Adam Neumann, who has become an emblem of Silicon Valley’s unfounded hype, recently secured a $350 million investment and a $1 billion valuation for his new real estate company, which plans to offer a brand product with community characteristics in the housing rental market.
In his 2022 book, Mallaby warned of the unicorn bubble that began to form in 2016 as late-stage investing newcomers began writing huge checks. Startup founders were treated like “emperors of the operation,” with little oversight, she said.
The drop in unicorn numbers could signal less excess money in the growth phase and a check on unicorn founders “when their arrogance turns toxic,” Mallaby said.
Touraj Parang, advisor to Pear VC and author of the start-up guide Exit routeHe also said that the drop in the number of unicorns is a sign of rationality and shows that startups that are able to raise funds will likely have to do so at lower valuations than in their previous rounds.
Others are skeptical. Investor Del Johnson said Silicon Valley can’t change places.
“When they talk about concepts like fundamentals and rationality, investors are simply nodding to conventional wisdom, which itself is based on consensus, not precise financial math,” he said. “Venture capital has never been a rational asset in the first place, so there can be no return to rationality.”