A billion dollar valuation, the Unicorn status was once the holy grail for many VCs and founders. At zero interest rates with a seemingly never ending flow of capital to fuel growth, Unicorn creation rate hit a peak in 2021, but fast forward 3 years and justifying a billion dollar valuation seems more like a liability. With the IPO window closed, growth funding severely dwindled and multiples down as a result of the public market, unicorns face tough choices in 2024.
The Unicorn’s struggle is a global phenomenon
There are a total of 1,224 unicorns globally, with a combined valuation of $3.7 trillion, according to CB Insights.
Battery Ventures Open Cloud 2023 report included this comparison chart of private software unicorns (1000+) vs. Software IPOs in the past 10 years (176) which shows the juncture many companies are in. With limited options for liquidity (M&A or IPO) and significantly less growth capital, unicorns face an uncertain future. They need to either raise, become profitable (default alive) or exit (M&A or IPO).
Lets examine these options:
Funding – Many of the unicorns minted in 2021 face difficulties in securing new investments at valuations comparable to their peaks, especially in a market skeptical of overvalued tech companies. In addition to the pricing issues, some of the biggest tech growth investors like Tiger Global and Softbank dramatically reduced their investments and are actively seeking to dump holdings in the secondary market at a steep discounts of 75% off or more.
M&A/ Exits – This situation is compounded by a narrowing window for mergers and acquisitions (M&A) and initial public offerings (IPOs). The M&A market has become increasingly selective, with potential buyers wary of high valuations that don’t align with company fundamentals
Private equity – In 2023 PE firms were seen deploying their capital in more cautious and strategic ways, reflecting the shift in market dynamics. Instead of purely chasing high-growth ventures, many PE firms focused on companies with robust business models and clear paths to profitability.
On the bright side, many expect the records amount of ‘dry powder’ available will start getting deployed more actively in the second half of 2024.
Spotlight on Israeli unicorns in 2024
Israel is home to 131 unicorns, over 10% of the global total. You can find the list of Israeli unicorns here and previous coverage on VC Cafe here. A year ago, it was already clear that approximately 50% of the Israeli unicorns probably cannot justify their valuation. While many unicorns struggled or disappeared amidst the “black swans” of the past few years (Covid, financial crisis, war), those that survived are now stronger and poised to benefit from their hard-earned lessons in 2024.
A recent feature by Calcalist’s Sophie Shulman and Meir Orbach analysed the underlying data of Israeli unicorns including annual revenues in 2023, the rate of growth, the number of employees today compared to the past, amount of funding, and runway expectations.
The Calcalist snapshot of the Israeli unicorn landscape is divided into six buckets:
- Traditional unicorns – need to justify their price tag by showing an earning multiple which is more in-line with the public market. Many avoided fundraising over the past two years to not risk losing their unicorn status. 2023 was the year of extensions, flat rounds, re-opening of rounds, etc. But the reckoning is coming one way or another.
- Ready to IPO – there are several Israeli startups with over $200 million of ARR who are waiting to IPO when the window opens. There’s a pecking order, and perhaps the right timing will be the end of the year or beginning of 2025.
- Decacorns – the top of the crop, still private but perhaps not yet ready for IPO, these unicorns have all achieved north of $100 million in revenue, but must show significant growth to justify up round valuations.
- Discount Unicorns – Tiger Global opened its entire portfolio for individual bids in order to provide liquidity to its limited partners, often selling stakes in unicorns at steep discounts.
- Zombiecorns – according to Calcaslist, these companies aren’t showing the growth, or earnings needed to keep their unicorn status.
- Deadcorns/ Graveyard – startups are no strangers to failure and closures, but it’s more rare to see companies shutting down after reaching a billion dollar valuation. There have several examples of this in recent months.
The only way is up
I will take a cautiously optimistic view and say that if the war doesn’t escalate to a whole regional conflict (we aren’t out of the woods yet), 2024 has the potential to be a better year to Israeli unicorns and startups as a whole. There’s been a process of ‘right sizing’ in venture and many growth investors played it safe and waited for the market to bottom out.
Startups that survived 2023 had to make significant adjustments: reduce their burn, improve their margins and unit economics and learn to operate in a capital constraint environment. If indeed the venture market will stabilise in 2024 after a turbulent year, my hope is that the companies that come out of it on the other side are now stronger, leaner and better prepared for profitable growth.
As mentioned by Calcalist:
2024 will be a year of difficult decisions. But it also has the potential to be a good year for Israeli high-tech, of course, given that the security situation and the war do not escalate to the northern front and the reservists return to the offices. The high-tech companies enter 2024 more mature and experienced, because of what their management went through, from the interest rate increases and the suspension of funding, to the judicial coup, the protests, and now the war.
Those who survived the last two years learned a great deal about proper management and also saw the other and less pleasant side of investors and customers. From here, the only way is up.
Aside from the financial outcome for the investors and employees of Unicorn companies, of which probably many have their options value ‘below water’, unicorns play an important role in training future founders. Founder Factories, a study by Accel and Dealroom found that Israel ranked #1 in Europe with 181 spinout startups, with former employees that originated from 45 different unicorns.
One thing is certain: the true value of Unicorns lies in performance rather than inflated expectations. So rather than optimise for high valuations, startups and investors should focus on building sustainable business models, nurturing genuine innovation, and ensuring operational efficiency to navigate the market landscapes successfully in 2024.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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