Unicorns, once a rare sighting for investors, have frolicked across Silicon Valley of late. Now the market seems to be yanking on the reins.
Venture capital research firm CB Insights reports the number of venture-backed startups achieving a $1 billion or more valuation ground to a halt over the last six months. In the first quarter of 2016, only five new unicorns arrived. That’s compared to an average of about 20 per quarter last year. The number of startups worth at least $1 billion has doubled since 2015 to more than 160, says CB Insights. At the same time, the number of such companies accepting “down rounds” or exits with lower valuations is now up. That number exceeded the quantity of new unicorns being created starting in the last quarter of 2015.
CBInsights provides a helpful tracker to view the carnage. While not lethal, devaluations hurt investors, founders and employees who have pinned their hopes on a lucrative exit. DoorDash, FlipKart, Jawbone and Foursquare all saw their valuations or share prices decline. Gilt Groupe, once appraised for more than $1 billion, sold for $250 million—less than the $284 million in capital it had raised.
That’s a good thing, argues Bill Gourley. In a blog post that riled the venture capital community, Gourley said that the overheated funding environment had spurred reckless valuations and investing. Market realities are applying discipline, and founders would do well to listen. Companies that get a handle on their unit economics and move toward profitability will survive. Those who use abundant venture capital to mask their weaknesses will have them revealed. “The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution,” he wrote.