If there’s one thing I know almost nothing about, it’s cricket. To my American eyes, it looks like some weird combination of baseball and a track meet, played with rowboat oars and lacrosse masks.
But what do I know? Cricket is wildly popular in the Indian subcontinent, the Caribbean, Australia, and various other parts of what was once the British Empire. According to the artificial-intelligence search engine Bard—and you know there’s no more famous Brit than the Bard—there are 2.5 billion cricket fans, making it the world’s second-most popular sport, trailing only soccer, er, football, which is another sport that entirely escapes me.
The time has come for me to finally figure out what a wicket is, and why it might get sticky. My timing is perfect: We’re smack in the middle of the inaugural season of Major League Cricket, the first U.S.-based professional cricket league. MLC has deep roots among Indian-American venture capital and technology execs—Microsoft CEO Sataya Nadella is an investor in the league’s Seattle Orcas franchise, for instance.
The Bay Area team—the San Francisco Unicorns—is controlled by Anand Rajaraman and Venky Harinarayan, a pair of long-tenured Silicon Valley entrepreneurs and investors who run a venture firm called Rocketship. (Adobe CEO Shantanu Narayen is also an investor in the team.)
The name Unicorns is a reference not to mythical one-horned quadrupeds, but rather to venture-backed tech companies worth $1 billion or more. I can’t tell you much about the outlook for the Unicorns—they’re 2-1 and tied for first place. If they succeed with their plans to build a stadium in Santa Clara, I’ll go check them out. But I’m more than a little concerned about Silicon Valley’s other unicorns.
About seven months ago in this space, I took note of the alarming population boom among pre-initial-public-offering tech giants over the past decade, growing from about 40 unicorns in 2013 to 1,350 lately, a more than 30-fold increase. What comes next won’t be pretty.
Coatue Management, an investment firm with holdings in both public companies and venture-backed start-ups, recently estimated that unicorns have a combined valuation of about $5 trillion, based on their most recent funding rounds. But Coatue puts their actual value at half that. And they aren’t simply being conservative—valuations have collapsed. Kelly Rodriques, CEO of Forge Global, which runs a trading platform for pre-IPO shares of venture-backed companies, said secondary market transactions have been taking place in line with valuations two funding rounds back, or more than 50% below the most recent round.
In short, while public tech shares have soared this year, the private market for similar companies turns out to be a giant, ugly mess. On Sand Hill Road, it’s still 2022. And unless conditions change, it could start to look more like 2001, when the internet bubble popped.
The venture sector’s most obvious problem is that the funds can’t do the one thing their limited partners most want them to do: sell. At the simplest level, what venture investors do is attempt to identify and fund small companies that can eventually become large companies, help them grow, and then sell them at a profit, either to another company or to public-market investors.
But for the moment, there’s no way out. Unicorns can’t go public, they can’t raise cash without taking a massive valuation haircut, and they are finding it well-nigh impossible to get acquired.
The market for IPOs of technology companies is closed tight and shows no sign of loosening materially in the near future. For one thing, there remains a considerable disconnect between the valuations that entrepreneurs and venture investors think their companies deserve, and the price that public investors are paying for comparable businesses. Compounding the problem is the fact that no one wants to go public at a valuation below their latest private round, which is what almost every unicorn would face if it tried to IPO in the current environment.
Meanwhile, U.S., United Kingdom, and European Union regulators are all determined to curb the power of the tech giants, which is making it nearly impossible for deep-pocketed potential buyers of promising young venture-backed businesses to go shopping. The tech industry has long relied on acquisitions to build its products and services, but regulators seem to think that all deals are bad deals. But no deals at all is a rotten deal for start-ups in this environment.
There are other problems. The demise of Silicon Valley Bank and generally tighter credit conditions have reduced the financing options available to the unicorn herd to tide them over while they await a change in the IPO and mergers-and-aquisitions landscape. Some firms are shopping positions in mid- and late-stage start-ups to generate cash for distributions to investors, given that other exit options are limited.
To be sure, the IPO window won’t be closed forever. There are companies—SpaceX, Databricks, Stripe, Canva, OpenAI—that could probably go public right now. But there are so many of them: Coatue estimates the current unicorn herd represents a 25-year backlog of IPOs at a pace of about one a week. Even at 2021’s elevated rate—when 124 venture-backed IPOs occurred—it would take a decade to take the whole group public. Meanwhile, Coatue also notes that global tech M&A activity this year is likely to be half or less than last year’s $620 billion, which was down from $850 billion in 2021.
“The industry is in denial,” says one Silicon Valley venture partner, noting that VCs enjoyed a nearly 15-year bull market, wit3h valuations for some software companies at the peak reaching 50 or even 100 times annualized revenue. But comparable public-market companies now trade at a single-digit multiple of annual recurring revenue, or ARR. Companies that can avoid it simply don’t want to raise more capital at a 50%-plus discount to their prior round. Which leaves the whole ecosystem in a pickle.
“There is going to be a reckoning,” says Cowboy Ventures partner Aileen Lee, who coined the term “unicorn” in a column for TechCrunch in 2013. “It won’t just happen in one day. It will play out over the next two years.”
She notes that a “decent chunk of the investor population” has never seen a prolonged downturn. Entrepreneurs, she says, have to focus on “capital efficiency, and ingenuity.” Start-ups will be “fueled by ramen, rather than five flavors of cashew milk.”
Already, a handful of private companies have reset their valuations, either to reflect new financing or to reset options pricing for employees. Stripe’s valuation is down 47%, while payment-processing rival Klarna cut its valuation by 85%. Instacart’s valuation is off 75%; online retailer Shein chopped its value by a third.
In a recent conference presentation, Coatue asserted that many unicorns that haven’t repriced might never get new capital, while noting that many herd members will run out of cash in 36 months or less. Forge Global notes that 88% of the start-ups it tracks haven’t raised any capital for at least a year. Most are losing money. Something eventually has to give.
The situation reminds me of Barron’s March 2000 cover story, “Burning Fast,” which warned that a whole host of bubble-era internet companies were likely to run out of cash. That prescient story, by my former colleague Jack Willoughby, focused on public companies, which made the problem easier to spot. This generation of troubled start-ups remains private, but they are no less challenged. It may take a year or two to unfold, but the unicorn herd is going to be culled; there is simply no way around it. Talk about sticky wickets.
Write to Eric J. Savitz at [email protected]
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