Business Startups Venture

Tracking The Pace Of Consumer And Enterprise Unicorn Formation

Morning Report: Which startup category is birthing more unicorns: consumer-oriented tech shops or enterprise concerns?

Over the weekend, Kleiner’s Eric Feng published an interesting report on the differing pace of unicorn creation between consumer and enterprise startups, the rise of incumbent empires and decacorns after the smartphone era shook out, and the importance of network effects.

It’s a long read that is worth starting your week with. This morning we’re not going to go over all of its arguments. Instead, we’ll examine one chart from the piece and try to make sense of it.

Using Crunchbase data, Feng produced the following chart, tracking the birth year of consumer and enterprise unicorns:

The chart itself is readable enough. But Feng’s interpretation was slightly surprising. But before we get to that, let’s examine how Feng reads the graph.

Starting with the obvious, the pace of consumer unicorn formation has slipped dramatically. From double peaks in 2010 and 2012, the totals posted in 2015, 2016, and 2017 are minuscule.

Feng notes that it takes time to build a unicorn, making some of the charted declines reasonable.1 However, that fact “doesn’t explain the decline in 2013 and 2014. Those companies have now had four or five years to develop, which is a long enough period to allow for the winners to have separated themselves by now.” So Feng views the 2013 and 2014 declines as surprisingly negative for consumer unicorn formation.

The venture capitalist is more bullish on enterprise unicorn creation, however, at least in terms of regularity, saying that “[t]he rate of hit enterprise startups has been quite consistent.” It does look a bit flatter from 2006 to 2014, so that seems a reasonable point.

Next, Feng comes to a conclusion of sorts: “But the most interesting thing is what happened in 2013 and 2014. As the number of consumer unicorns declined steeply, the number of enterprise unicorns held up.”

That is a little bit contrary to how I read the chart. Yes, consumer startup unicorn birth fell from 2012 to 2013 per the graph, and creation further dropped from 2013 to 2014. But enterprise unicorn birth fell about the same from 2013 to 2014 as consumer unicorn births. What we can say is that enterprise unicorn formation had a better 2012 to 2013 than consumer unicorns, but the latter was coming off a record high. And both fell from 2013 to 2014 roughly the same amount—if you read past the curve of the lines and check the absolute drop for both in the period.

This would be a bit of a niggle if the more recent data didn’t mostly match. After 2014, both consumer and enterprise unicorn birth fell nearly linearly. You can also include 2013 and that point holds water.

I don’t mean to undercut Feng’s thesis about FAANG valuation creation and value creation concentration. But to use the post-2013 data from above to argue that enterprise startups managed to keep being born at a healthier pace seems like a stretch.

What we can say is that the unicorn era began earlier than many suspected. It’s everyday wisdom in Silicon Valley that many unicorns were founded in or around the 2008 financial crisis and the ensuing domestic economic crater. That certainly holds true per the chart. But what I think fewer people thought through was how far back the unicorn trend stretches. Around 15 unicorns were founded in 2005 (reading the graph without a ruler). From 2006 to 2008, it looks like around two dozen were formed yearly. That’s a lot.

What time will eventually make clear for us is whether the declines posted by both startup categories from 2013 to today remain.

If they do, woe betide the new mega funds that are banking on huge exits to generate sufficient returns to provide a net multiple on billions of dollars.

  1. As it takes time for a startup reach a unicorn valuation and thus add a point to its founding year on the chart, we would expect

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