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The billion-dollar tech unicorn is becoming rare again

The ultimate symbol of Silicon Valley wealth became commonplace. Then the economy shifted.

Pixelated unicorn
The unicorn became the ultimate symbol of Silicon Valley exuberance. It has become more scarce. (The Washington Post)

SAN FRANCISCO — The hot social media network BeReal — which is gaining steam with young people as a casual alternative to Instagram — recently raised money, a key milestone on the path of any successful start-up.

It had all the elements of a buzzy start-up, like Snapchat, Clubhouse and Pinterest before it. It was popular with college students and even beat out social media video rival TikTok on Apple’s App Store. But when a report this month confirmed how investors valued the company, it was reportedly worth in the ballpark of $600 million — far short of the “unicorn” status of more than $1 billion many of its predecessors earned in frothier times.

A billion dollars may seem to be a big bet, but unicorn status for years has helped young companies attract employees and media attention, as well as offer founders runway to pursue new ideas and cachet with potential partners. Many now-established start-ups such as Airbnb and Uber that have shaken up long-standing industries depended on deep-pocketed investors to cover losses while they struggled to compete.

But BeReal’s experience is representative of a new reality in Silicon Valley.

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As employee layoffs, CEO resignations and belt-tightenings eliminate some of the excessive perks for which tech companies are known, investors here minted only 25 companies worth over $1 billion each in the third quarter of 2022, according to the venture capital research firm CB Insights. A year ago, there were more than five times as many new unicorns.

The drop is a harsh dose of rationality that is much needed in an environment that rewards big promises and falls prey to hype, investors said.

“It’s going to get a ton of founders who shouldn’t be doing it out of the ecosystem — people doing it for money and fame,” said the venture capitalist Paige Craig, founder of Outlander VC, who invested in companies including Twitter and Lyft.

But the shock waves rattling the tech sector eventually could hit innovation and reduce competition in an industry already dominated by Big Tech companies including Apple, Google, Facebook and Amazon.

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As interest rates spike and concerns over a global recession send shudders through the economy, tech companies big and small are slowing hiring and cutting new investments. Google’s CEO has implored his workers to show “more hunger,” and thousands of start-up employees have lost their jobs over the past six months. Tech company stock prices — which had marched steadily upward over the past decade — finally have fallen back to earth. The Nasdaq 100, an index representing the biggest public tech companies, is down 30 percent this year.

Meanwhile, investors have yet to find the next big technological innovation to transform the way we live. Unicorns in theory represent the moonshot ideas that will help Silicon Valley land on the next big thing, but crypto, Web3, and virtual reality have not yet taken off despite the billions funneled into them.

Once-prolific investors including the venture firm Andreessen Horowitz, which invested in BeReal’s first funding round, have pared back their investments. The amount of venture capital funding going into late-stage start-ups fell nearly 50 percent in the third quarter compared with the second quarter, according to the venture capital research firm PitchBook Data. And some are bracing for a cultural shift from abundance to survival mode.

More than a decade ago, the $1 billion unicorn start-up became an aspirational marker of success in Silicon Valley. It reflected the exuberance and optimism of a near-mythical bastion of the economy where the boom times never seemed to end.

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Investors agree to commit a certain dollar amount of funding to a start-up to help it get off the ground in exchange for a stake in the company, with the expectation that eventually it will go public or be acquired. The valuation is calculated by how much an investor pays for a stake — for example, a 10 percent stake at $100 million would value a company at $1 billion. But that value is all on paper, and there is no guarantee the company will ever be worth that amount.

The term “unicorn” was adopted in 2013 by the venture capitalist Aileen Lee and was meant to denote the fact that a start-up that crossed that threshold was extremely rare. No other concept so neatly embodied the magical thinking that fueled sky-high valuations that were based not on real revenue or profit but simply on a company’s ability to keep growing.

The stock market was still struggling after the 2008 financial collapse, and start-up founders increasingly chose to stay private instead of going public and listing on the stock exchange, accepting big checks from venture capital firms that offered favorable terms without the price volatility of stock trading.

“That is what gave rise to unicorns,” said Sebastian Mallaby, the author of The Power Law, a book about the rise of the venture capital industry.

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Many of those companies never lived up to the spectacular expectations thrust upon them. At one point, the office-sharing company WeWork was valued by its investors at $49 billion, but it now trades publicly on the stock market at less than $2 billion. The blood-testing company Theranos was valued at $10 billion at its peak. In January, a jury found its founder Elizabeth Holmes guilty of defrauding investors.

Still, the concept of the unicorn became a lasting one in Silicon Valley, and companies that could command big valuations attracted the best employees and investors.

Venture firms, which invest money in young companies with the hope of reaping major rewards down the road, historically have made the biggest returns on just a few of the many firms in which they invest.

A mentality of growth at all costs helped companies including Facebook, Google and Amazon become the dominant firms they are today. For years, those companies were relatively unprofitable, reinvesting their earnings in their businesses. But eventually, they became some of the most valuable companies in the world, turning early investors who stuck with them into billionaires. (Amazon founder Jeff Bezos owns The Washington Post.)

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The massive amounts of money being made when companies went public attracted even larger venture capital investors, among them pension funds, sovereign wealth funds and private-equity giants.

In 2021, unicorn companies were being created at a rate of more than two per business day, according to CB Insights, becoming almost commonplace.

But as governments pushed up interest rates this year to stave off inflation, big investors such as pension funds and sovereign wealth funds abruptly left the venture capital market to focus on less risky and long-term investments, said Kyle Stanford, a senior analyst with PitchBook Data.

“There’s not enough capital to really make investments that are going to create unicorns,” Stanford said.

And as the stock prices of public companies dropped, the private markets followed.

BeReal declined to comment. There are additional reasons it may have raised capital at a lower rate, including that brands have struggled to use its service, or that TikTok and Instagram have copied the app’s sole feature.

Some existing unicorns have had to lay off employees, and others have been acquired in fire sales.

Brex, a financial tech company that raised money in January at a valuation of more than $12 billion, laid off 11 percent of its staff this month. BlockFi, which had been valued at $4.5 billion, was acquired by FTX, another crypto company, for $240 million.

Bird, the e-scooter start-up, once was valued at $2.85 billion as investors poured money into companies that mimicked Uber’s model for revolutionizing transport. It became publicly traded last year and is now worth $89 million.

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One of the biggest effects likely to hit consumers is an increase in prices.

Tech start-ups long subsidized prices to help ensure faster growth. Even if they eventually raised prices, other start-ups with new money often came along with their own subsidized products as they fought their way into crowded markets.

That dynamic now may be less common. Consumers who are accustomed to low fees on food delivery or free returns on direct-to-consumer glasses and mattresses may see those options disappear.

There are exceptions to the gloom. Artificial intelligence start-ups are attracting a lot of interest and funding, on the strength of several tech breakthroughs in the field. Stability AI, which has released software to the public that can create elaborate images from simple text prompts, raised more than $100 million at a $1 billion valuation according to Bloomberg News.

WeWork founder Adam Neumann, who became emblematic of unfounded Silicon Valley hype, recently netted a $350 million investment and $1 billion valuation for his new real estate start-up, which plans to offer a branded product with community features in the housing rental market.

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In his 2022 book, Mallaby warned about the unicorn bubble that started to form in 2016 when newcomers to late-stage investing began writing enormous checks. Start-up founders were treated like “emperors of the operation,” with little oversight, he said.

The drop in the number of unicorns could signal less excess money in the growth phase and a check on unicorn founders “when their hubris turns toxic,” Mallaby said.

Touraj Parang, an adviser at Pear VC and the author of the start-up guide Exit Path, also said the drop in the number of unicorns is a sign of rationality and shows that start-ups that are able to raise funding probably will have to do so at lower valuations than in their previous rounds.

Others are skeptical. The investor Del Johnson said Silicon Valley cannot change its spots.

“When they talk about concepts such as fundamentals and rationality, investors are merely gesturing to the conventional wisdom, which is itself based on consensus, not accurate financial math,” he said. “Venture capital has never been a rational asset in the first place, so there can be no return to rationality.”

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