Some billion-dollar startups risk losing ‘unicorn’ status

Known as unicorns, startups valued at $1 billion or more tend to be later-stage ventures, often poised for a public-market debut. Now with their cash reserves running low and the market for initial public offerings largely frozen, many are facing tough choices in the months ahead—not least, how to raise new capital in a down market without selling high-priced shares at a discount, analysts said.

Frothy markets in recent years boosted the number of unicorn startups worldwide to well over 1,000 in 2022, though the pace at which companies become unicorns slowed sharply in the second half of the year, according to research firm CB Insights.

Fewer than 10 fundraising rounds in November produced startups with post-money valuations of $1 billion or more, down from a2022 monthly high of 48 in January, according to PitchBook Data Inc., a market data analytics firm.

Despite the slowdown, the collective value of unicorns worldwide reached $4.5 trillion as of Dec. 21, up from $3.9 trillion at the end of 2021, according to a joint unicorn market index created by PitchBook and financial-services company Morningstar Inc.

Scott Burger, a partner in KPMG’s Bay Area alternative investment practice, said most unicorns are taking lessons from the early days of the Covid-19 pandemic to conserve cash and extend the length of time they can operate without new financing.

Throughout most of 2022, many late-stage startups avoided the risk of a down round—in which share prices drop below values fetched in a previous round—by tapping cash reserves, extending previous funding rounds and taking on debt.

Dave Rogenmoser—chief executive of Jasper, an Austin, Texas-based artificial-intelligence startup that reached unicorn status in October after a $125 million Series A funding round—said finding good business partners is just as important as scoring a high valuation.

“When I see a gap, I think of all the possible ways to fill it," Mr. Rogenmoser said. That could include “an infusion of capital, a killer new hire or strategic investor," he said.

Continuing turbulence in public markets is also keeping mature startups from launching an IPO, a common way for venture-backed companies and their investors to cash out. Instacart Inc., a grocery-delivery startup valued at $39 billion in 2021, pulled its plans to go public this year, citing tumultuous market conditions.

The number of IPOs globally dropped 45% this year from 2021, to 1,333, while total proceeds fell 61% to $179.5 billion, according toyear-end estimatesby Ernst & Young.

Large startups that were considering IPOs in 2022 are now looking at the second half of 2023 as the earliest window to go public, Mr. Burger said. But by staying private, many of these startups will eventually require more cash to grow. “Companies that need to raise capital in the short-term are looking at down rounds, or potentially structured financings to preserve a headline valuation," he said.

For unicorns hovering just above the $1 billion threshold, a down round could mean losing the coveted unicorn status.

“We believe 2023 is going to be a difficult year for these companies," said Kyle Stanford, a senior analyst at PitchBook. Mr. Stanford said he expects to see an accelerated rate of down rounds as continued public-market uncertainties force mature startups to stay private.

But worse, he said, startups that became unicorns over the past few years—as low interest rates drew a flood of cash into the startup ecosystem—will need to readjust to a new investor mind-set that puts a startup’s potential to achieve profitability over its ability to achieve fast growth.

“It’s easy for the market to say it is shifting toward a focus on profitability, but it’s a longer process for companies deep in their development to shift their model," Mr. Stanford said.

With funding deals scarce, and IPOs not happening, many unicorns “will likely be far more receptive to an acquisition than they have been in the past," said Matthew Walsh, senior managing director and head of tech equity capital markets at SVB Securities.

Mr. Walsh said the enormous cash balances of large public technology firms, combined with historic levels of dry powder held by private equity, are expected to drive a “significant increase" in acquisitions in the year ahead.