The age of the unicorn is over

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The age of the unicorn is over

The Economist | Feb 22, 2024

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Business has never been better for America’s tech giants. After slumping in 2022, the combined market value of Alphabet, Amazon, Apple, Meta and Microsoft has surged by 70%, to over $10trn, since the start of 2023 amid the hype over artificial intelligence (ai). The technology has also propelled others into the industry’s upper echelons.  Thousands of smaller ai firms have popped up, too. 

Yet it would be a mistake to think America’s startup scene is returning to its former exuberance.  Bar a few high-profile exceptions, such as Openai, investors have been especially wary of signing cheques at lofty valuations. Throughout the 2010s the number of unicorns—private companies with valuations above $1bn—soared in America. Fully 344 of them were minted in 2021. Last year’s figure was 45.

The end of the era of cheap money is largely to blame. In the go-go years, as investors raced to get a piece of the buzziest startups, tech firms had little need to tap public markets for capital.  

Now investors are mulling how to sell their stakes in the unicorns of yesteryear. Most vc funds operate on a ten-year clock, backing startups in the first five and cashing out in the second. With over 700 unicorns, at a combined valuation of $2.4trn, a sizeable amount of money is at stake.  

The first way to exit is through an initial public offering (ipo). Yet the OPI market remains at a standstill, with 83 vc-backed listings in 2023, down from 309 in 2021.  The second path to an exit—a sale to a corporate buyer—is also partly blocked. Only 698 vc-backed firms were purchased by companies last year down from 1,311 in 2021. Selling to another private investor—the third option—is not too attractive, either. Private valuations in the so-called secondary market are below those at the latest fundraising round for more than four-fifths of unicorns.  Amid the drought, some unicorns have simply collapsed. 

That is a sad fate for the founders, employees and investors of those once-promising firms. But others need not be overly worried.  And there is plenty to celebrate in the newfound sobriety of Silicon Valley.  It is rare these days to find a startup that espouses growth at all costs. Founders have rediscovered the concept of frugality. Many are being cautious with their hiring, a striking contrast to the race for talent during the pandemic. It helps that the industry’s giants have flooded the market with thousands of techies following a bout of layoffs.  What’s more, ai is providing American startups not just with new business ideas, but also ways to do more with less. 

3 key takeaways from the article

1. Business has never been better for America’s tech giants. After slumping in 2022, the combined market value of 5 tech giants has surged by 70%, to over $10trn. Thousands of smaller AI firms have popped up, too.  Yet it would be a mistake to think America’s startup scene is returning to its former exuberance.  The end of the era of cheap money is largely to blame.
2. Now investors are mulling how to sell their stakes in the unicorns of yesteryear. Exit through an initial public offering, a sale to a corporate buyer or selling to another private investor are either partly block or not too attractive because of various reasons.  Amid the drought, some unicorns have simply collapsed.
3. But there is plenty to celebrate in the newfound sobriety of Silicon Valley.  It is rare these days to find a startup that espouses growth at all costs. Founders have rediscovered the concept of frugality.  What’s more, AI is providing American startups not just with new business ideas, but also ways to do more with less. 

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Topics:  Startups, Venture Capitalists, Entrepreneurship, Interest Rate, Capital Markets