Fewer Unicorns in 2022 – A Cause for Concern?

A recent look at global monthly Pitchbook data depicting companies surpassing the USD 1 billion valuation threshold (so-called Unicorns) appears sobering: September of 2022 produced 10 Unicorns valued at a total of USD 13.5 billion. In contrast, September of 2021, the peak month of Unicorn birth to date, yielded six times as many (61), totaling almost ten times the volume (USD 125.8 billion).

In light of recent risk repricings in both public and public markets, long-duration equity appears to have been hit hard. This is when one applies the fixed income concept of higher sensitivity to interest rate changes to equity investments with long-shot cashflow projections.

Surviving a brutal game of musical chairs

For years, historically low interest rates had driven up equity valuations, creating a favorable climate both for private and public market investors. This environment created a bonanza for venture capital and other private market strategies. Cheap money brought new (some claim unconventional) participants into the equation, and leverage (for example, as in leveraged buyouts) was employed to boost dwindling returns as specific deals, and market segments became crowded. This game of musical chairs continued into 2020, seeing its peak during the global pandemic, as governments enacted massive stimulus packages and central banks intervened to keep the economic engine afloat. This additional influx of money allowed market participants to engage in a record number of deals accompanied by lofty valuations. And then, in late 2021, the music stopped playing. The surge in inflationary indicators led central banks to initiate a sharp and, for some, unexpected rise in interest rates. Additionally, the impact of the Ukraine war, especially on commodity prices and already stretched supply chains, accelerated fears of stagflation (a scenario of stagnating or contracting GDP figures paired with inflation). For many startups, there were no chairs left. Some had difficulty raising money at the pre-crisis valuations or postponed taking up fresh funds to avoid the adverse effects of a so-called down-round. Others were often left in the rain with nothing more than a catchy business idea and shuttered their business.

2021 will go down in history as an outlier

Still, anyone predicting an end to venture capital investing better apply a different perspective. In the first three quarters of 2022, more companies crossed the USD 1 billion threshold (281, to be precise). This is more than in any year before 2020, despite all the macroeconomic uncertainty and geopolitical turmoil. Moreover, the increase in the number of Unicorns produced is in line with recent years, except for 2021.

Certain verticals continue to produce Unicorns even in difficult times

While new Unicorn valuations have returned to pre-pandemic levels, some verticals thrive even in challenging environments. A disproportionate amount of new Unicorns are active in Software-as-a-Service (SaaS), Cybersecurity, Artificial Intelligence & Machine Learning, Big Data, FinTech, FoodTech, Mobility, CleanTech, Cybersecurity, or Wellness.

Unicorns are elusive. If you invest prudently, they may come to you

Given this list of verticals, one might assume Stableton’s investment approach targets unicorns. Instead, it’s the other way around: we focus on high-growth verticals and companies that are either currently experiencing macro tailwinds or are mainly immune to public market risk. Incidentally, there is still significant Unicorn creation there. Once such example is Bellabeat, a company disrupting several verticals such as Digital Health, FemTech, HealthTech, LOHAS & Wellness, Wearables & Quantified Self. Bellabeat has been a Unicorn since August 2022.