A billion dollars may seem like a big bet, but unicorn status has for years helped young companies attract employees and media attention, as well as offer founders a runway to pursue new ideas and pitch with potential partners. Many now-established startups like Airbnb and Uber, which have shaken up long-standing industries, depended on deep-pocketed investors to absorb losses while struggling to compete.
But BeReal’s experience is typical of the new reality in Silicon Valley.
Telecommuting changed their lives. They don’t go back to the office.
As layoffs, CEO layoffs and belt-tightening eliminate some of the disproportionate benefits tech companies are known for, investors here hit just 25 companies for more than $1 billion 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 fall is a much-needed dose of sanity in an environment that rewards big promises and becomes prey, investors said.
“It’s going to get a lot of founders who shouldn’t be making it out of the ecosystem — people who are doing it for money and fame,” said venture capitalist Paige Craig, founder of Outlander VC, which has invested in companies including Twitter and Lyft. .
But the shock waves rocking the tech sector could ultimately stifle innovation and reduce competition in an industry already dominated by tech giants including Apple, Google, Facebook and Amazon.
Inflation helps gig companies like Uber and hurts their workers
As interest rates rise and worries about a global recession send chills through the economy, tech companies big and small are slowing hiring and scaling back new investments. Google’s CEO has urged his employees to show “more hunger” and thousands of new hires have lost their jobs in the past six months. Tech stock prices – which had been steadily rising for the past decade – have finally come crashing back down to earth. The Nasdaq 100, an index representing the largest public technology companies, is down 30 percent this year.
Meanwhile, investors have yet to find the next big technological innovation to change the way we live. Unicorns theoretically represent the moonshot ideas that will help Silicon Valley land the next big thing, but crypto, Web3 and virtual reality have yet to take off despite the billions poured into them.
Once prolific investors, including venture capital firm Andreessen Horowitz, which invested in BeReal’s first round of funding, have scaled back their investments. The amount of venture capital funding going to late-stage startups fell nearly 50 percent in the third quarter compared to the second quarter, according to venture capital research firm PitchBook Data. And some are preparing for a cultural shift from abundance to survival.
More than a decade ago, the $1 billion unicorn company became a symbol of Silicon Valley success. It reflected the hubris and optimism of a near-legendary economic front where the boom seemed never-ending.
Investors agree to commit a specific dollar amount of funding to a startup to help it get off the ground in exchange for a stake in the company, with the hope that it will eventually go public or be acquired. The valuation is calculated based on how much an investor pays for a share – for example, a 10 percent stake at $100 million would value a company at $1 billion. But these values are all on paper and there is no guarantee that the company will ever be worth it.
Coined in 2013 by venture capitalist Aileen Lee, the term “unicorn” was meant to represent the fact that a startup that crossed that threshold was extremely rare. No other concept so neatly encapsulated the magical thinking that fueled sky-high valuations based not on actual revenue or profits but simply on a company’s ability to continue to grow.
The stock market was still struggling after the 2008 financial crash, and startup founders increasingly chose to go private instead of going public and listing on a stock exchange, accepting large checks from venture capital firms that offered favorable terms without stock price volatility. change
“It’s what created unicorns,” said Sebastian Mallaby, author of The Power Law, a book about the rise of the venture capital industry.
Kakao is Korea’s app for almost everything. Its powerlessness forced a reckoning.
Many of these companies never lived up to the grandiose expectations placed upon them. At one point, the office-sharing company WeWork was valued by its investors at $49 billion, but it is now publicly traded on the stock market at less than $2 billion. Blood testing company Theranos was valued at $10 billion at its peak. In January, a jury found its founder Elizabeth Holmes guilty of defrauding investors.
Still, the idea of the unicorn persisted in Silicon Valley, and companies that could command high valuations attracted the best employees and investors.
Venture firms, which invest money in young companies with the hope of reaping big returns along the way, have historically generated the highest returns on a handful of the many companies in which they invest.
A growth-at-any-cost mentality helped companies including Facebook, Google and Amazon become the dominant companies they are today. For many years these companies were relatively unprofitable and reinvested their earnings in their business. But in the end, they became some of the most valuable companies in the world, turning early investors who stuck with them into billionaires. (Amazon founder Jeff Bezos, per The Washington Post.)
Silicon Valley braces for technological regression after a decade of decadence
The huge sums of money made when companies went public attracted even bigger venture capitalists, including pension funds, sovereign wealth funds and private investors.
By 2021, unicorn companies were being created at a rate of more than two per business day, according to CB Insights, and became almost commonplace.
But as governments boosted interest rates this year to stave off inflation, big investors like pension funds and sovereign wealth funds suddenly left the venture capital market to focus on lower-risk, longer-term investments, said Kyle Stanford, senior analyst at PitchBook. Data.
“There’s not enough capital to make the real investments that will create unicorns,” Stanford said.
And when the stock prices of public companies fell, the private markets followed suit.
BeReal declined to comment. There are more reasons why it could have raised capital at a lower price, including that brands have struggled to use its service, or that TikTok and Instagram have copied one of the app’s features.
Some existing unicorns have had to lay off employees and others have been obtained at fire sales.
Brex, a financial technology company that raised funds in January at a valuation of more than $12 billion, laid off 11 percent of its workforce this month. BlockFi, which had been valued at $4.5 billion, was acquired by FTX, another crypto company, for $240 million.
Bird, the e-scooter startup, was once valued at $2.85 billion as investors poured money into companies that emulated Uber’s model of revolutionizing transportation. It went public last year and is now worth $89 million.
Taiwan, a major semiconductor producer, says it will comply with US rules
One of the biggest impacts likely to hit consumers is an increase in prices.
Technology companies have long subsidized prices to ensure faster growth. Even if they eventually raised prices, other startups with new money often brought their own subsidized products as they fought their way into crowded markets.
This miracle now may be rarer. Consumers accustomed to low fees for food delivery or free direct-to-consumer returns on glasses and mattresses may see those options disappear.
There are exceptions to the darkness. Artificial intelligence startups are attracting a lot of interest and funding, due to several technological breakthroughs in the field. Stability AI, which has released software to the public that can create elaborate images from simple text messages, raised more than $100 million at a $1 billion valuation, according to Bloomberg News.
WeWork founder Adam Neumann, who became a symbol of unfounded Silicon Valley hype, recently paid a $350 million investment and a $1 billion valuation for his new real estate company, which plans to offer a branded product with community features to the rental market.
Scam apartments are everywhere. Here’s how to spot them.
In his book 2022, Mallaby warned of the unicorn bubble that began to form in 2016 when newbies in late-stage investing started writing huge checks. Startup founders were treated like “the czars of the operation,” with little oversight, he said.
A decline in the number of unicorns could indicate less excess cash in the growth phase and a check on unicorn founders “when their hubris becomes toxic,” Mallaby said.
Touraj Parang, an advisor at Pear VC and author of the startup guide Exit Path, also said the decline in unicorns is a sign of wisdom and shows that startups that can raise money will likely have to do so at a lower valuation than their previous rounds.
Others are skeptical. Investor Del Johnson said Silicon Valley could not change its position.
“When they talk about terms like fundamentals and common sense, investors are just pointing to conventional wisdom, which itself is based on consensus, not precise financial mathematics,” he said. “Venture capital was never a rational asset to begin with, so there is no going back to rationality.