For the past decade, “unicorn” has been the de facto term for privately held companies with a valuation of over $1 billion that are not publicly traded. Since their inception, the number of “unicorns” has increased from 40 to over 1,100, but this rapid expansion has been met with challenges. Many of these companies have experienced setbacks in foreign markets as a result of recent monetary tightening. Startups, which have traditionally relied heavily on outside funding and placed a premium on rapid expansion, have reached a crossroads in this business model.
“Although the listed stocks are in the winter, the ‘unicorn’ winter will last longer,” Masayoshi Son, chairman and president of SoftBank Group (SBG), said in a gloomy outlook during an earnings briefing in August. If you compare the daily fluctuations of listed stocks to the revaluation of unlisted stocks, you’ll see that the latter only occur at the time of financing. After spring of 2022, according to Masayoshi Son, the downturn in listed high-tech stocks will trickle down to unlisted stocks.
Some of the companies in which SoftBank Group has already made investments have even seen their values fall. Sweden’s Klarna, a buy-now-pay-later service, had a valuation cut by 85% in July compared to its funding round from the previous year. According to Reuters, the largest “unicorn” company, China’s ByteDance, will implement a share buyback based on a corporate valuation of around $300 billion. As far as can be seen, it’s up to 25% below what the private market would value it at in 2021.
“Non-traditional investors” like SoftBank Group and Tiger Global Management, a US hedge fund, are to blame. Since about 2017, when interest rates were at an all-time low, these funds have increased their investment in start-up companies, a sector previously dominated by venture capital (VC), and have been pouring large sums of money into companies that are close to investment recovery, thereby increasing corporate valuations.
However, in light of recent events (rising interest rates, etc.), this trend has recently “reversed.” CB Insights predicts that between January and June of 2022, the median valuation of U.S. startups that have raised more than five rounds of funding will drop from $2.1 billion to $2 billion. Non-traditional investors’ shifting perspective is further confirmed by the decline in the number of new “unicorn” businesses.
Businesses once considered “unicorns” must adapt to the modern business landscape. Base (Sebastian Siemiatkowski) said that Sebastian Simyatkovs, CEO of Klarna, was able to raise capital by lowering the company’s valuation because “investors in recent years have focused on future growth, but also profitability.” Klarna has reduced its workforce by 700, or 10%, and tightened its credit policies in order to prioritize profits.
As of right now, there aren’t many instances of companies having to reduce their market values. PitchBook data shows that fewer than 10% of US startups were successful in securing funding between April and June. One such investor is Yosuke Honda, general partner at DCM Ventures in the United States.
However, it is also true that founders and early-stage shareholders’ shareholdings will decrease in value as a result of a valuation cut, which will dampen the morale of employees with higher option compensation. U.S. investment firm Capchase CEO Miguel Fernandez recently warned that a rise in the frequency of downward valuations was possible if the current market environment persisted.
The birth of Facebook (now Meta) in the United States followed the bursting of the Internet bubble in the early 2000s, and the opportunity presented by the 2008 financial crisis in the United States led to the creation of Airbnb. It’s not necessarily bad that we’ve entered a “survival of the fittest” environment where only the strongest companies can thrive, but we have reached a point where we need to strike a balance between expanding our business and protecting ourselves. Neither can Japan, which has adopted the promotion of “unicorns” as a national growth strategy.