The status of being a unicorn is not as secure as it once seemed.
Nearly 90% of the 128 companies that achieved valuations of $1 billion or more in 2021 are now estimated to be valued lower in private trades, Bloomberg reported Wednesday (Dec. 6), citing data from alternative trading venue operator Forge Global.
About a third of these companies have seen their valuations drop below the $1 billion threshold that made them a unicorn, according to the report.
This decline in valuations has made it more challenging for these startups to pursue their long-awaited initial public offerings (IPOs), the report said.
One of the key challenges faced by these companies is the reluctance to seek fresh funding for fear of attracting lower valuations than their previous rounds, per the report.
Private market trades, which provide real-time valuations of these companies, have become a crucial indicator, according to the report. However, companies and investors argue that such trades are based on limited information and that the most recent funding round is a better indicator of a startup’s value.
The term unicorn, once used to emphasize the scarcity of such companies, has now become an arbitrary benchmark for investors, the report said. Some larger public equities portfolio managers may find companies valued below $1 billion too small to invest in, given the amount of analysis involved.
Maintaining unicorn status holds value, per the report. Investors believe that once a company reaches the billion-dollar mark, it has a greater chance of going public or finding a merger and acquisition (M&A) exit. In a market focused on returns and how they will be realized, maintaining unicorn status can be a sign of a startup’s worth.
With global IPOs on track for the lowest volume in over a decade, many private companies are eagerly waiting for the market to open, according to the report. Startups that have managed to maintain their unicorn valuations have demonstrated their worth to investors who may have backed companies that listed at sky-high valuations in 2021, whether they were ready for the public market or not.
Among the latest companies to achieve unicorn status, 60% are generative artificial intelligence (AI) companies. Beyond that, the AI fervor has added $2.4 trillion to the market capitalizations of American tech giants.