In the ever-evolving landscape of startups and venture capital, the term "unicorn" has held a mythical allure for entrepreneurs and investors alike. For years, achieving a billion-dollar valuation has been touted as a stage gate to guaranteed success —a milestone that many continue to strive relentlessly to reach. However, as we begin to reflect on the events of 2023, it's becoming increasingly clear that the unicorn status, once celebrated as the pinnacle of entrepreneurial achievement, may no longer be the gold standard it once was.

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Valuation Inflations and the Down Round Reckoning

In the heady years of 2021 and early 2022, both early and late stage valuations soared to dizzying heights. Investors, driven in part by FOMO and an overwhelming sense of perceived scarcity of quality deals, rushed to flood promising companies with capital, often inflating valuations far beyond their intrinsic worth. In 2021 alone, 107 early round (seed, Series A, or Series B) unicorns were crowned, compared to 2020’s 38.

While the unicorn frenzy created headlines and hype, it also sowed the seeds of a potential reckoning that founders and investors alike started to experience as 2022 progressed. Fast forward to today, and we're witnessing the aftermath: many of these once-soaring unicorns are facing the cold reality of massive down rounds.

Down rounds, where a company's valuation drops significantly from its previous high-water mark, are painful and costly experiences for both founders and investors. In 2023, we're seeing a substantial number of companies that were anointed as unicorns in the previous years now grappling with these circumstances - 21% of all venture deals for Q2 of 2023 were down rounds, marking their highest prevalence since 2016.

Take Instacart’s recent IPO, where it received a valuation of $10B compared to its former $39B in 2021. While a drastic example, an event that has traditionally signaled a massive win for all parties involved spelled returns that couldn’t even beat the S&P 500 for anyone that participated after Instacart’s Series B back in 2014.

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How Did We Get Here?

Post Pandemic Bounce Back: As the global economy began recovering from the COVID-19 pandemic, investors looked for opportunities to deploy dormant capital. Funding across both public and private markets surged, specifically in sectors related to technology, e-commerce, biotech, and healthcare, as the world adapted to remote work, digital solutions, and health-related innovations.

Low Interest Rates: The persistently low-interest rates set by central banks around the world made traditional investments less attractive. Investors, seeking higher returns, turned to riskier asset classes like venture, driving up demand and valuations. As a result, available capital inflows surged, triggering established firms and newly formed funds to compete to invest in promising startups. This influx of capital, often referred to as a "wall of money," pushed valuations higher, so larger funds were raised so investors could continue to participate, valuations rose further as a result, and so on. In this case, the positive feedback loop that occurred was anything but positive.

Perceived Scarcity: With increased investor interest, startups with strong growth potential found themselves in a favorable position to negotiate higher valuations. Many startups had multiple funding options, allowing them to command higher prices, driving even higher notorious investor FOMO. Media attention surrounding numerous IPOs + SPACs put the heat on investors to get in on the next big thing - or in this case, many next big things.

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Unicorn Bubble Burst: Part 2?

Similar to the enthusiasm of 2021 around crypto, blockchain, and FinTech, the beginning of 2023 marked another monumental shift in capital deployment with the explosion of generative AI tech into the mainstream eye of the public and hands of developers. While it’s common sentiment that the current funding landscape lends its power firmly to the hands of investors, as of Q2 2023, 18 early stage unicorns have been anointed, about half of which reside within the land of Generative AI. Investors are facing pressure to identify the next OpenAI or adjacent operation - see Nvidia’s success story - from their LPs, and once again find themselves confronted with the age-old challenge of balancing extensive due diligence when time is of the essence, versus following gut decisions based on market hype.

In a year or two, will we be facing the same prevalence of down rounds and losses we’re experiencing today in a new wave within the world of AI startups? And moving a level higher - are the destinies of these once seemingly invincible companies that theoretically held and provided massive value, now solely dependent on interest rates and trending topics?

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Beyond Unicorns: Rethinking Success

From our perspective here at Hunsicker, success can no longer be solely measured by a singular number or unicorn status. While the next major platform shift likely lies within AI, we also need a major shift that prioritizes a more holistic view of meaningful and sustainable metrics that measure a business’s ability to genuinely address market needs, create value for customers, and generate sustainable profits. Though 10-figure valuations are coveted, we would be remiss to say that companies with 8 figure valuations, predictable paths to profitability, and tangible impact to spare have a future any less promising.

In this new paradigm, the emphasis is on building a resilient, adaptable business model and a strong company culture from day one. As entrepreneurs, we need to prioritize profitability over vanity metrics, and conversely, investors should seek startups with solid fundamentals rather than teams focused on driving the growth of only one number. As we've seen, a billion-dollar valuation can be ephemeral, but a sound business model and a loyal customer base can withstand the test of time. These are the startups that will shape the future - and the ones we’re focused on creating here at Hunsicker - regardless of their unicorn status.