Unicorns ruled for a decade, but tech needs a new beast now
A call has gone out to focus on startups with strong fundamentals and at least US$100 million in annual revenue, instead of on those with a valuation of at least US$1 billion
IT’S been a decade since the term “unicorn” was coined by Silicon Valley venture capitalist Aileen Lee to describe startups that had reached a US$1 billion valuation. The moniker quickly became coveted.
Yet today, unicorns aren’t so rare. Having reached a peak in the heady, liquid days of 2021, the number of startup unicorns being created globally is now in decline – to 95 last year from 621 in 2021, according to market intelligence firm CB Insights, thanks in part to higher interest rates and greater scrutiny from investors.
In some ways, that has been a healthy correction. As the rise of generative AI threatens to create more froth in the market once again, though, investors should maintain their focus on startups that have strong fundamentals as well as long-term promise.
Here’s a new name for firms that fit the bill: thoroughbreds.
These are companies bringing in at least US$100 million in revenue annually, said London venture capital firm LocalGlobe founder Saul Klein, who is pushing for a change in the investing lexicon. Startups that have at least US$25 million in annual turnover are “colts”, he adds.
He isn’t the first to try and steer the conversation back towards more rational investing with a animal metaphor.
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Others have proposed dragons or centaurs, but Klein wants to avoid mythical beasts.
“It’s not just about hope and promise, but hope and promise times fundamentals,” he said.
The last few decades have shown that new tech can reshape industries and boast exponential growth.
It is why venture capital has become one of the best-performing asset classes over the past decade, said Morgan Stanley.
But the “unicorn” label has spun out of control, with startups sometimes resorting to desperate measures to achieve this coveted status as quickly as possible.
Some engage in multiple fundraising rounds over short periods to hit the magical US$1 billion threshold; others pivot to trends like blockchain or AI to capitalise on the market hype. WeWork famously touted unrealistic growth targets as its valuation soared past “decacorn”.
Europe is a good place to shift the focus to revenue, thanks to its transparency requirements.
The region’s startups still lag Silicon Valley in their ability to acquire higher, later-stage funding, making it harder to scale up to become the next Microsoft or Alphabet.
But local VC firms already prioritise sustainable business models over valuation metrics, in part because they can see the numbers. Unlike their US counterparts, European startups are subject to more stringent regulations requiring financial disclosures.
Although it’s almost impossible to find out revenue figures for US companies such as San Francisco-based Scale.ai (which just raised US$1 billion at a US$14 billion valuation) or its neighbour Anthropic (which is said to be worth between US$15 billion and US$20 billion), you can easily get them for any two-person private firm in the UK, since all registered businesses must file annual financial statements with Companies House, the government’s registrar.
Until now, European institutional investors have taken that approach too far, shying away from putting their money into new tech that holds great promise.
When the AI lab DeepMind was getting off the ground, its founders struggled to find backers who would put more than £30,000 (S$51,600) into the enterprise. They had to fly to Silicon Valley to get the millions they needed from the likes of Peter Thiel and Elon Musk instead. Eventually, Google bought DeepMind for US$650 million.
It didn’t help that European investors were cajoled into doing their patriotic duty by “supporting” the local tech ecosystems – think French President Emmanuel Macron, targeting 25 unicorns by 2025.
Klein said: “Investors were reasonably saying: ‘For what?’. These science projects? This is people’s retirement savings. We’re not charities.”
To turn the tide, it might help for institutional investors to see the broad number of thoroughbreds across the country and the wider European region.
British investors, for one, are poised to make bigger bets, now that its domestic pension providers – who manage assets worth about US$3 trillion – have pledged to assign 5 per cent of their default funds to “unlisted equities” by 2030, providing a boost to the country’s tech sector.
They would do well to turn their attention to the 118 startups in the UK that are bringing in more than US$100 million in revenue, according to market intelligence firm Dealroom.io.
Startups themselves should also resist unicorn envy. In the long run, success can become as mythical as the name.
The writer is a Bloomberg Opinion columnist covering technology. She is author of We Are Anonymous
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