Almost by definition, tech unicorns raise a lot of money. Getting to a billion-dollar valuation doesn’t come cheaply, and once it’s clear that a tech company is on a unicorn trajectory, investors fight to get into its financing rounds.
Just how much of the money venture capitalists invest goes into feeding these capital-hungry companies? The amount might surprise you.
For the set of 107 US-based tech companies founded in or after 2004 that reached at least a billion-dollar valuation while still private, we found that these unicorns raised approximately 20.3 percent of all pre-IPO, non-private equity venture capital and debt financing.
The chart below shows the amount of money raised by unicorns and non-unicorns alike. Pulled from Crunchbase data, we analyzed over 46,000 venture capital and debt financing deals struck with US-based companies founded in or after 2004.
As we previously mentioned, this dataset accounts for over 46,000 rounds for which we know the dollar amount, which is only a portion of the total number of rounds closed during this period. $322.9 billion was accounted for in these Seed, Angel, Series A+ and pre-IPO debt financing rounds. Of that, $65.8 billion was raised by the 107 tech unicorns in our dataset.
We made a choice to include debt financing events in our analysis because it is capital that the company can use to finance growth. Even though some companies don’t draw from the debt facilities they set up, many do. Just like with equity funding rounds, there are going to be instances of companies raising money to put in the war chest, rather than spending it straight away on growth.
Let’s see just how much capital unicorns raised relative to other companies founded during the same time period. The chart below shows the percent of total capital raised by unicorns during the “unicorn epoch” of 2004 through the present.
One thing you’ll notice is that the data point for 2004 is quite small. Although there were seven unicorns founded in 2004, just one firm, Facebook, actually raised money in its founding year. And Facebook’s $500,000 check from Peter Thiel pales in comparison to the total amount of money raised by the hundreds of other companies founded in that year.
Over time, the relative share of funding raised by tech unicorns has increased, and spiked to record levels within the past couple of years. But why is this the case? One explanation is a slight change in the population dynamics of unicorns over time. The number of unicorns founded in any given year has remained relatively stable, with a couple of very important exceptions.
Apart from 2007 and 2009, which saw spikes in the number of unicorn companies being founded, the number of unicorns founded in each year since 2004 has been fairly steady, ranging between five and ten companies per year. (For the record, according to our dataset, there were 23 unicorns founded in 2007 and 20 founded in 2009.) Even as some unicorns get acquired or go public, their ranks grow steadily.
It’s those two spikes in unicorn founding activity in 2007 and 2009 that could explain the rapid growth in the percentage of funding that unicorns received relative to companies in a similar age range. In both the case of unicorns and non-unicorns, the average amount of money companies raise peaks at around seven or eight years after the company is founded.
The chart below shows the average round size for all companies as a function of the number of years since their founding date.
Note that the chart incorporates all companies, including unicorns. For unicorns alone, this chart would be more jagged and the numbers much larger – by a factor of ten in some cases – but average round size still peaks in year seven at an average of $241 million.
We see a local maximum in the relative share of venture financing unicorns attract around 2015. This coincides with the period of time in which those companies founded in 2007 and 2009 would be raising some of their largest financing rounds, which is indeed the case for many unicorns. In 2016, seven years after its founding, Uber raised its $3.5 billion Series G and an additional $1.15 billion in debt. In 2015, Airbnb closed its $1.5 billion Series E round, seven years after it was founded in 2008.
Going forward, we argue that unicorns’ share of the funding pie will continue its downward trend from its peak in 2005. There are a couple of reasons for this.
First, as we showed earlier, 2007 and 2009 were anomalies in terms of the number of unicorns founded in those years. As unicorns of the 2007 and 2009 vintage continue to mature, they are less likely to raise capital in the private market. These companies will “graduate” to public markets to raise more funds, or they will reach some degree of financial sustainability requiring less outside capital
However, although it’s true that the glut of unicorns founded in 2007 and 2009 will move further down the pipe as time goes on, that’s likely only part of the story. The circumstances that allowed so many of these companies to raise huge sums of money from the private market appears to have been temporary. The historically low interest rates that have benefitted private investors since the 2008 financial crisis are starting to rise.
As very cheap capital becomes a thing of the past, VCs and other private investors will simply lack the capital to invest in the huge Series D+ rounds on which the likes of Uber, Airbnb, and others have relied. Now that the tech IPO market is starting to rev up again in the US, relying on private markets is becoming a non-issue.
This isn’t to say that there aren’t going to be as many private companies valued at a billion dollars or more. It’s just that the unprecedented amount of capital raised by a handful of companies in 2014 and 2015 is going to be a historic high water mark that could go unsurpassed for a long, long time.