For a single year, it appeared that the venture gambit was going to work out: Hundreds of startups hoped to be worth billions on paper and exit in good order. Sadly for investors and founders alike, that year — 2021, as I am sure you’ve guessed — turned out to be more of an outlier than an indicator of a new normal.
The Exchange explores startups, markets and money.
Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.
Since 2021, the value of American startups has cratered and how: Total exit value last year was only around 10% of 2021’s total, according to a recent PitchBook report. Thus far in 2023, exit value is even more in the dirt. If we annualize the startup exit value of Q1 2023, the total value of M&A and IPOs of American private tech companies would be around 68% less than the already-depressed numbers of 2022.
Leaning on several PitchBook reports, TechCrunch+ has compiled the following graph of American venture-backed startup exits from 2012 through the first quarter of 2023:
Are these declines in exit value material? Yes. Does it matter? Also yes, but it has taken longer than we expected for the broader market to start getting worried.
For years, we’ve seen unicorns being minted more rapidly than the pace at which they went public. PitchBook’s numbers make it clear just how much value was created in the private markets during the exit window and after that window closed (emphasis ours):
While the average post-money valuation of US-based unicorns has remained relatively consistent over the past decade, at approximately $3.2 billion, the growth in the number of billion-dollar enterprises has boosted their collective valuation to nearly $2.4 trillion—roughly 10% of the US’ total GDP. This is even more remarkable considering that just one decade ago the collective value of unicorns made up only 0.4% of the US’ GDP.
The report also points out that of the total 704 active U.S.-based unicorns, a staggering 534 were “created since 2021.” Not only does this evince a massive acceleration in the pace of unicorn birth, it implies that most unicorns minted since 2021 have not exited and are thus existing in a period of time when liquidity has ossified.
The venture markets are not proving warm either. Bloomberg reported earlier this week that “more than 400 companies — one-third of all unicorn startups, those valued at $1 billion or more — haven’t raised new funding since 2021.” (There are more unicorns globally than just in the United States, explaining the difference between the unicorn number in this statistic and the figure shared in the paragraph above.)
The IPO market is the biggest reason for the decline in the value of these formerly richly valued startups and the broader market’s exit volumes. PitchBook data from early 2022 indicates that around 88% of 2021-era exit value was derived from public offerings.
This means that until the IPO window reopens — or until unicorns are willing to brave the files and be dehorned on the way out — there is little reason to hope that exit activity will perk up. Indeed, a more recent report from PitchBook counted up just $3.7 billion worth of M&A activity at U.S.-based, venture-backed startups.
You could argue that with so many unicorns out in the field in the past few years, 2021 brought some much-needed startup liquidity — call it California rain. But it was just delaying the inevitable. Down rounds, firesales and shutdowns are likely the leading options for unicorns running thin on cash in the coming months.
To be fair to investors and founders, we’ve been wrong about just how acute the unicorn liquidity drought has proved historically. However, with other exit avenues looking rocky and VC investment itself slowing, that could change.
Software valuations have recovered some and the group of companies that could make for strong, early unicorn IPO candidates is expanding. But until we get a few 2021-esque years of IPOs, the unicorn backlog will continue to rot on the vine.
Comment