Unicorns Dominated for a Decade. Tech Needs a New Powerhouse

The term "unicorn," coined by Silicon Valley venture capitalist Aileen Lee in 2013, has become a coveted label in the startup world. It signifies startups that achieve a $1 billion valuation.

Initially, this status was rare and prestigious. However, the landscape has changed significantly, with the number of unicorns peaking in 2021 and subsequently declining. According to market intelligence firm CB Insights, 621 unicorns emerged globally in 2021, but this number fell to just 95 last year. This decline can be attributed to factors such as higher interest rates and increased scrutiny from investors.

The reduction in new unicorns is seen by some as a healthy market correction. The rush to achieve unicorn status led many startups to engage in multiple fundraising rounds in quick succession or pivot to trending technologies like blockchain or AI, often resulting in inflated valuations. For instance, WeWork became infamous for its unrealistic growth targets and unsustainable valuation. This frenzy created a market environment where valuations often overshadowed the actual financial health and long-term viability of companies.

In light of these issues, some industry leaders are advocating for a shift in focus towards startups with solid fundamentals and long-term growth potential. Saul Klein, founder of London venture capital firm LocalGlobe, proposes a new terminology to encourage more rational investing.

He suggests referring to startups with at least $100 million in annual revenue as "thoroughbreds," while those with $25 million in annual turnover could be called "colts." Unlike mythical creatures like unicorns, thoroughbreds emphasize tangible achievements and sound business practices.

Klein's push for more grounded investment strategies aligns with a broader trend in venture capital. Over the past decade, venture capital has become one of the best-performing asset classes, largely due to the transformative potential of new technologies. However, the emphasis on reaching a $1 billion valuation quickly has led some startups to take desperate measures, such as engaging in multiple rapid fundraising rounds or shifting their business models to capitalize on current market trends. This often results in inflated valuations that do not reflect the company's true financial health.

Europe presents a unique opportunity to shift the focus from valuation to revenue. The region's stringent financial disclosure regulations require startups to be more transparent about their financial performance. Unlike in the United States, where it can be difficult to ascertain the revenue figures of private companies, European startups must file annual financial statements. This transparency allows investors to make more informed decisions based on actual financial data rather than hype or speculation.

Historically, European institutional investors have been more cautious about investing in new technologies. The experience of DeepMind, an AI lab that struggled to find substantial backing in Europe and ultimately turned to Silicon Valley for funding, illustrates this conservative approach. European investors often prioritize sustainable business models over aggressive growth metrics, partly due to regulatory requirements for financial disclosures.

However, there are signs that European investors are beginning to make larger bets on tech startups. In the UK, for instance, domestic pension providers managing assets worth about $3 trillion have pledged to allocate 5% of their default funds to "unlisted equities" by 2030. This move is expected to provide a significant boost to the country's tech sector. According to market intelligence firm Dealroom.io, the UK has 118 startups generating more than $100 million in annual revenue, indicating a robust pipeline of potential thoroughbreds.

The push for more rational investment strategies is also reflected in the rhetoric of European leaders. French President Emmanuel Macron, for example, set a target of creating 25 unicorns by 2025. While this goal aims to boost the local tech ecosystem, it also raises questions among investors about the practical benefits of such targets. Investors are understandably cautious about investing in "science projects" without clear financial returns, especially when dealing with people's retirement savings.

Ultimately, the shift towards focusing on revenue and sustainable growth over valuation metrics is a positive development for the startup ecosystem. By prioritizing companies with strong fundamentals and long-term potential, investors can avoid the pitfalls of the unicorn frenzy and support more stable and viable businesses. Startups, too, should resist the allure of unicorn envy and focus on building solid, revenue-generating businesses.

This more measured approach is not just about mitigating risks but also about fostering a healthier and more sustainable tech industry. As the excitement around generative AI and other emerging technologies grows, maintaining a focus on fundamentals will be crucial. Investors and startups alike must balance hope and promise with financial discipline and strategic foresight. By doing so, they can create lasting value and drive meaningful innovation in the tech sector.

In summary, the evolution of the term "unicorn" and the shifting investment landscape highlight the need for a more rational and sustainable approach to funding startups. As the market continues to adjust, the emphasis on revenue, transparency, and long-term growth will help ensure that the next generation of tech companies are not just mythical creatures but real, thriving businesses.