By Orping and Hiroshi Imahori
Unlisted companies with corporate valuations of more than $1bn have been known as "unicorns" for a decade. The number of unicorns, which has grown from about 40 to more than 1,100, is now facing the headwinds of monetary tightening and a number of overseas setbacks. The business model of start-ups, once flush with cash and primed for future growth, is turning a corner.
"It's winter for listed stocks, but the winter for unicorns will last longer," Masayoshi Son, chairman and CEO of SoftBank Group Corp., said in an earnings briefing in August. Whereas listed stocks fluctuate from day to day, the revaluation of unlisted stocks is limited to the time of capital raising. Son believes the decline in listed high-tech stocks after the spring of 2022 will gradually spill over to unlisted stocks.
In fact, some of SoftBank's investment targets have already seen their valuations drop. In July, Sweden's Klarna, a buy-now, pay-later service, raised money at a valuation that was 85% lower than a year earlier. China's ByteDance, the world's largest "unicorn" company, will carry out a share buyback based on a company valuation of around $300 billion, the report said. Appears to be as much as 25% below its valuation in the private markets in 2021.
Behind it lies the actions of "non-traditional investors" such as SoftBank and Tiger Global Management, the US hedge fund. Against a backdrop of low interest rates, these funds have since 2017 stepped up investment in start-ups that were once the monopoly of venture capital, particularly by pouring money into companies whose payback was near, driving up valuations.
Now, however, the situation has "reversed" in the context of rising interest rates. According to CB Insights, the median valuation of start-ups that raised more than five rounds was $2 billion in January-June 2022, down from $2.1 billion in 2021. New "unicorns" are also declining, confirming the changing attitudes of non-traditional investors.
Unicorns need to cope with a new business environment. "In recent years investors have been very focused on future growth, but also profitability," said Sebastian Siemiatkowski, chief executive of Klarna, which raised money after slashing its valuation. Klarna has cut 700 jobs, or 10% of its workforce, tightened credit management and put more emphasis on profitability.
Not many companies are being forced to downgrade their valuations. PitchBook statistics show that less than 10 percent of U.S. startups raised money from April to June. Among investors, there are many calm voices such as Yosuke Bundo, general partner of DCM Ventures in the U.S., who said, "In recent years, we have easily raised more money than we can afford, but now we are moving toward a normal situation."
On the other hand, it is also true that lower valuations will reduce the value of the holdings of founders and early shareholders, demoralizing employees who are paid more in options. Miguel Fernandez, CEO of Capchase, a U.S. investment firm, said, "If the current market environment is maintained, it will be more difficult for startups to maintain high valuations," warning of more downvaluations in the future.
After the dotcom bubble burst in the early 2000s, Facebook (now Meta) was born in the US, and the 2008 US financial crisis was the catalyst for Airbnb. The survival of the fittest environment, where only the strong survive, is not necessarily bad, but it is entering a situation where growth and defence must be balanced. Japan, whose national growth strategy is to cultivate unicorns, is not immune to this.