Unicorns all over the world have had a painful decade.

Unicorns all over the world have had a “painful decade.”

The term “unicorn” has been used for 10 years to refer to privately held businesses with a valuation of over $1 billion that are not publicly traded. The “unicorns,” which have increased in number from 40 to more than 1,100, are currently encountering challenges due to monetary tightening, and many businesses have also experienced setbacks in international markets. As a result, startups, which have traditionally relied heavily on outside funding and placed a premium on rapid expansion, are now at a crossroads.

At an earnings briefing in August, SoftBank Group (SBG) chairman and president Masayoshi Son expressed pessimistic expectations, saying, “although the listed stocks are in the winter, the ‘unicorn’ winter will last longer.” In contrast to the daily ups and downs of listed stocks, the revaluation of unlisted stocks only occurs at the time of financing. To paraphrase Masayoshi Son, after the spring of 2022, the decline in listed high-tech stocks will gradually spread to unlisted stocks.

The value of some companies in which SoftBank Group has already invested has even fallen. During its most recent funding round in July, Sweden’s Klarna, a buy-now-pay-later service, was valued at a discount of 85% from its valuation during the previous round in 2016. According to Reuters, the largest “unicorn” company in the world, China’s ByteDance, will implement a share buyback based on a corporate valuation of around $300 billion. On the private market, it appears to be up to 25% cheaper than its expected value in 2021.

A group of “non-traditional investors,” including SoftBank Group and the American hedge fund Tiger Global Management, are responsible for this. Against the backdrop of historically low interest rates, these funds have increased investment in start-up companies that were previously dominated by venture capital (VC) since around 2017. In particular, these funds have poured large amounts of money into companies that are close to investment recovery, pushing up 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 fall to $2 billion, from $2.1 billion in 2021. It’s also true that the number of “unicorn” businesses is decreasing, which points to the shift in focus among non-conventional financiers.

Unicorns must adapt to the modern business landscape. CEO Sebastian Simyatkovs, who raised capital after reducing corporate valuations with the help of Base (Sebastian Siemiatkowski), explains that investors are now more concerned not only with Klarna’s long-term growth prospects, but also with the company’s profitability. To prioritize profitability, Klarna has tightened up on credit management and laid off 700 workers, or 10% of its workforce.

At the moment, few businesses have been forced to reduce their stock prices. PitchBook data shows that fewer than 10% of U.S. startups were successful at raising capital between April and June. For example, Yosuke Honda, general partner at DCM Ventures in the United States, is one of many investors who is known for speaking calmly and rationally.

However, it is also true that the value of founders’ and early shareholders’ holdings will decrease and that employees whose compensation consists of more option grants will feel less motivated. According to Miguel Fernandez, CEO of U.S. investment firm Capchase, “if the current market environment is maintained, it will become increasingly difficult for start-ups to maintain high valuations,” indicating a future increase in the frequency with which companies’ valuations are revised downward.

When the dot-com bubble burst in the early 2000s, the United States gave birth to Facebook (now known as Meta), and the Great Recession of 2008 gave rise to Airbnb. In a “survival of the fittest” market, only the most robust businesses can thrive; this isn’t necessarily a bad thing, but it does mean that a delicate equilibrium between expansion and protection must be maintained. Neither can Japan, which has adopted the promotion of “unicorns” as a national growth strategy.

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