Venture

Unicorns Are Being Minted In Earlier Rounds Like Never Before, Valuations Skyrocket

Not only were new unicorns minted at a breakneck pace in 2021, but they were created in early-stage funding rounds at an unprecedented rate.

While nearly 600 new unicorns were minted last year, about 18 percent were companies reaching  that status after an early-stage funding round—defined as seed, Series A or Series B, according to Crunchbase data. Last year saw more than 100 unicorns created through early funding rounds, nearly 5x the number in 2020.

Included in those numbers are U.S.-based startups such as crypto exchange Gemini hitting a $7.1 valuation, crypto payment company MoonPay reaching $3.4 billion, and Sierra Space seeing $4.5 billion—all after Series As.

In addition, Crunchbase numbers show those early rounds that bred unicorns totaled nearly $26 billion—more than 5x the total value of the early-stage rounds that minted new unicorns in 2020. Valuations similarly soared, as total valuations of unicorns born from early-stage funding hit $218 billion, compared to just $38 billion in 2020.

So young, so much money

Investors in the industry say there are several factors as to why so many young companies are able to hit such astonishing valuations so early.

“Part of it is the demand and supply issue—a lot of capital chasing too few quality deals, but also these valuations speak volumes about the ability of visionary founders today to create long-term value,” said Ashish Kakran, principal at Thomvest Ventures

“There are many emerging markets where the winners aren’t yet obvious,” he said. “Large companies will be created in areas like data infrastructure, (machine learning) operationalizing and cloud security.”

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A quick glance at the numbers show companies in fintech and, specifically, crypto were most likely to hit a big valuation during early funding rounds. According to Crunchbase numbers, 20 companies listed under fintech got to a $1 billion-plus valuation last year in early rounds, while 16 listed as crypto companies did similar.

Kakran said we will continue to see higher valuations for emerging category leaders, but likely only a few of these companies will grow into the valuation.

Buyer beware

Arjun Kapur, managing director of Forecast Labs—a startup studio by Comcast Ventures—said aside from good companies in growing sectors leading to investors placing big bets, other factors are also at play.

“There is market frothiness,” said Kapur, an investor in Public.com, which reached unicorn status last year. “What I mean by that is we are seeing a lack of investment discipline. That discipline is important.”

The last year also has seen a “gold rush” into very emerging—but not totally proven—sectors like Web 3.0, crypto and even the metaverse, which are still in early days but nevertheless have minted unicorns in early-stage rounds, Kapur said.

“That is what you have to be worried about—why is this happening now?” he said.

Another reason there has been a flood of new unicorns is the rise of crossover funds, said Ryan Bloomer, founder and managing partner at early-stage investment firm K50 Ventures.

“You look at the Tigers and SoftBanks of the world, and they have so much money they have to put to work,” he said. “They have to write a large check and that pushes these valuations.”

Challenges

Although those high valuations may bring a certain cache, investors say hitting such a number can be harmful to companies still at the early funding stage.

Mainly, companies risk the possibility of “down rounds”—rounds at a lower valuation than the previous—following an early round that mints it a unicorn. Such down rounds can be the kiss of death when it comes to attracting new investors or even retaining previous investors, Kapur said.

The other issue is the bad dynamic and tension it can create between the founder and existing investors and board members, he adds.

Both the possibility of down rounds and tension within the company can create an atmosphere where a company starts to chase revenue numbers, sometimes hindering growth and innovation.

“A down round … can have devastating consequences on a company if it happens,” said Boris Golden, a partner at Partech who leads seed investing.

Despite the challenges with creating young unicorns, investors right now seem more willing to bet on the future of a company than just the recognition of what has been accomplished in the past. However, Golden points out the level of risk these companies have can be more significant than those in the later stages.

“But this risk is compensated for the investors by the increased upside on the big winners,” he adds.

Not everyone, however, will be a big winner. With the public market going through its own turmoil and questions abounding about the sustainability of the frothy venture market, Bloomer notes, founders should tread carefully.

“Be sure you are not setting yourself up for failure,” Bloomer warns. “I think we are going to see a lot of interesting things in the next year or so.”

Illustration: Dom Guzman

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