Evening Brief – 12.14.23
Not All Unicorns are Created Alike
The number of unicorns, or startups with $1 billion valuations, has surged from 39 when the word ‘unicorn’ was first used a decade ago to nearly 2,500 companies founded in the last 20 years, according to private equity firm Bain & Company research.
Despite the proliferation in unicorns’ numbers, under 1% of these businesses generate $1 billion or more in revenues and cash, a truer measure of sustainable success, Bain wrote in Herd on the Street: So Many Unicorns, So Little Cash.
Startups that have achieved $1 billion in annual revenue as well as the same amount in annual cash flow, demonstrating their business models, are extremely unusual, according to the firm.
Only about 250 of the 2,500 companies with $1 billion market valuations (both public and private) have crossed the $1 billion milestone, and only 15 generate more than $1 billion in cash and revenues.
These companies include Tesla, Meta, JD.com, Li Auto, Meituan, Pinduoduo, Sunshine Insurance, Vipshop, and Xiaomi, each with revenues of more than $10 billion and cash generation of over $1 billion, as well as Airbnb, BioNTech, Daqo New Energy, Jazz Pharmaceuticals, Palo Alto Networks, and ServiceNow, each also having achieved $1 billion in revenues and cash generation alongside $1 billion-plus valuations.
The 15 companies that have achieved this status make up just 0.7% of the total number of unicorns. Nonetheless, these businesses represent $2.3 trillion in market value.
The rarity of exceptional businesses that move beyond an early vision of disrupting markets to build and scale compelling business models has significant consequences for venture capital fundraising, noted Bain.
Amid tighter financial conditions given elevated interest rates, and venture capital becoming scarcer, the analysis suggests that founders looking to raise capital in the coming years, as well as those building ‘Engine 2’ businesses within existing major companies, will have to focus more closely on real revenues and cash generation.
The analysis also identified a new class of “emerging insurgent” businesses: those that have exceeded $1 billion in revenue but have yet to earn $1 billion in cash flow (at least as publicly stated). Of the 206 public businesses classified as “emerging insurgents,” some, such as Uber, are expected to surpass the $1 billion cash flow mark in the near future.
However, the firm discovered that many others have failed to act quickly enough to develop sustainable businesses. While Meta took seven years and Tesla, as a more capital-intensive corporation, took 15 years to reach $1 billion in cash flow, more than half had yet to pass this threshold.