Capital Markets

Unicorns Squeezed Between Capital Crunch and Blocked Exits

Some unicorns may have to risk raising a flat or down round or explore debt options due to a lack of exit choices, says PitchBook.
Unicorns Squeezed Between Capital Crunch  and Blocked Exits

U.S.-based “unicorns” — privately held startups valued at $1 billion or more — could face a tough 2023 as venture investment falls and the options to give investors a liquidity event shrink.

Record amounts of money in the venture ecosystem from 2013 to 2023 drove the aggregate number of unicorns in the United States from 35 to 704 for a collective valuation of nearly $2.4 trillion, according to PitchBook Data’s latest institutional research. 

However, there’s a growing imbalance between capital supply and demand, partly due to nontraditional venture investors fleeing the market. That will make it harder for unicorns to stay fully funded in the private markets while they make plans for an exit.

At the same time, the M&A and initial public offering markets are near a standstill, meaning VC-backed companies have a shortage of exit opportunities for founders, employees, and investors. 

This liquidity crunch has consequently trapped enormous amounts of value within highly valued organizations. — Vincent Harrison, PitchBook Data

Since 2022, just $78.7 billion in exit value has been generated within the U.S. VC market — an 87.2% decline from the record $768.3 billion achieved in 2021, according to PitchBook.

In a research commentary, “The Decline of Unicorn Acquisitions in a Conservative M&A Market,” PitchBook analyst Vincent Harrison said, “This liquidity crunch has consequently trapped enormous amounts of value within highly valued organizations.”

According to Pitchbook, there were only five acquisitions of unicorns in 2022, compared with 24 in 2021 and 17 in 2020.

Overall, only $39.6 billion in U.S. acquisition value has occurred since the beginning of 2022, “which makes it the least active year since 2015,” according to PitchBook. 

Dampened M&A

While the lack of IPOs is well-discussed, M&A deals are rare among unicorns. There are few companies with the excess cash to pursue purchases of unicorns, and those that do have “may be unwilling to spend that money on individual acquisitions, especially in the current market environment,” said Harrison.

Less than 25% of U.S.-based unicorns are profitable, said the PitchBook analyst. “While they often have high valuations and large amounts of funding, they also tend to have high burn rates as they invest heavily in market share and a ‘growth-at-all-costs’ model.”

In addition, the Biden administration’s antitrust crackdown makes “active tech acquirers such as Amazon, Apple, Google, and Meta — all of which are currently being investigated by the FTC or DOJ — uncertain whether their proposed deals will be approved or face lengthy antitrust reviews.”

The acquisition rate for unicorns is likely to remain limited for at least the remainder of 2023, reducing the number of liquidity options for these companies and “potentially reducing their bargaining power [or] negatively affecting valuations,” according to Harrison.

These relatively mature startups “will likely have to risk raising a flat or down round, explore debt options, or, in an ideal case, achieve positive cash flow to wait out a hostile financing environment,” according to PitchBook’s first quarter VC Valuations report.

Being labeled a “unicorn” has benefited some of these companies, allowing some to attract “additional pockets of venture funding from both traditional and nontraditional sources.”

With fewer investments from corporate venture capital, private equity firms, asset managers, and sovereign wealth funds, only $7.8 billion of late-stage deal value in the first quarter involved a nontraditional investor, according to PitchBook, about 10% of the sum invested in 2022.

The total number of late-stage deals completed in the first quarter of 2023 was slightly higher than the previous quarter. Still, the median deal size fell about 25% to $6 million, the lowest figure observed since the second quarter of 2017. (See the table below for a list of 2023 transactions so far.)

The subsequent capital crunch has substantially impacted valuations: The median late-stage valuation in Q1 fell to $5 million, an 8.3% decline from Q4. “The decrease in deal sizing speaks to the dearth of capital at the late stage,” according to Harrison.

PitchBook’s VC Valuations report estimates the capital-demand-to-supply ratio at the late stage to be 3.24x. That translates into $3.24 of capital sought by late-stage startups for every $1 of capital supplied by investors.