The end of easy money: Unicorn bubble implodes and normalcy returns

AI hype and hoopla has replaced crypto, blockchain, FinTech, and other hypes & hoopla. You have to keep up with the times.

In the second quarter 2023, only 12 venture-capital-backed startups in the US became “unicorns”: meaning they received funding that valued them at over $1 billion. PitchBook’s quarterly unicorn tracker shows that 9 startups achieved unicorn status in Q1, the lowest number since January 2018.

In Q3 of 2021, at the height of the unicorn startup bubble fueled by easy money, 95 startups were transformed into unicorns. In 2021, the final year of easy money from the Fed, 362 unicorns were created in the US. Their combined value was nearly $1 trillion.

In Q2 2022 the Fed started raising rates, and there were only 59 new unicorns. In Q3 of 2022, only 32 unicorns were born.

In Q1 2023 with interest rates nearing 5% the Fed, the number of unicorns created would have dropped by 90%. There were only 9 new unicorns. Now the Fed rates are at 5.25% and there will be more rate increases. Normality is returning to the startup world:

In normal times, 12 unicorns are created every quarter. In the Fed’s bubble of easy money, however, anything and everything became a unicorn.

Five of the twelve newly-minted unicorns (42%) in Q2 had “artificial Intelligence” labels.

In Q3 2021 at the height of the unicorn bubble only 17% (of the 95 new unicorns) had AI labels. Popular labels then included Crypto, Blockchain Fintech AdTech Saas Marketing Tech Clean Tech etc. The hype and hoopla of the past has to be replaced by modern technology.

Values plunge

In Q2 of 2023, 12 new unicorns were valued at $15 billion. This is the lowest valuation since Q4 2016. The average unicorn valuation plummeted to $1.2 billion. It was the lowest valuation in PitchBook’s data dating back to Q1 2016

In Q1 2021, with QE and near-0% rates of interest in full swing, the 82 unicorns were valued at $327 billion. This is an average of $4.0 billion for each unicorn.

The Fed raised rates, the unicorn bubble collapsed

The stocks of hundreds former unicorns, and even less than unicorns, that managed to go public via IPO, direct list, or merger with a SPAC have now collapsed, and they have become heroes in the pantheon of – Imploded stock.

Due to this background, and the hundreds of millions of dollars lost by gullible investors on this hype and hoopla show, it is now difficult for iffy companies to pull off expensive IPOs and SPAC merges.

Also, corporate buyers are cutting back. The exits for VCs and early investors – when they can sell their stakes at a large profit – are almost closed.

This has been a humbling experience. This dampened VC funding in general. The valuations were lowered. This led to funding rounds with lower valuations than previous rounds, the dreaded ‘down rounds. It allowed recent investors and stakeholders to dictate terms more favorable to themselves and less favorable to earlier investors.

There are signs of a return to normalcy after years of easy-money that allowed for some of the most costly and disastrous decisions.

Original

Editor’s Note: Seeking Alpha editors selected the summary bullets in this article.