 | This article needs to be updated.(June 2024) |
A unicorn bubble is a theoretical economic bubble that would occur when unicorn startup companies are overvalued by venture capitalists or investors. This can either occur during the private phase of these unicorn companies, or in an initial public offering. A unicorn company is a startup company valued at, or above, $1 billion US dollars.
This increase in billion dollar startups is due to investors' readiness to funnel money into equity holdings in startups, with the total investment by venture capital firms rising from $68 billion in 2014 to $77.3 billion in 2015, and from $48 billion in 2014. [1] [2] Venture capitalists and academics are warning that given the lack of change in startup's overall profitability and future cash flows, the rise in valuations are unsustainable and unjustified. Startups are performing financially the way they always used to, but with greater resources. For example, a Harvard survey of venture capitalists found 91% of venture capitalists think that unicorns are overvalued. [3] The efficiency in the use of the resources therefore is diminished and signals lower profitability for the future. [4] [5] [6] These higher burn rates leading to lower profitability will decrease investors' gains in the next 5 to 10 years. The negative impact on venture capital firms will leave investors less inclined to further invest and invest in new companies. This decline is already manifesting itself in the number of startups with unicorn status and the total valuation of unicorns. [7] [ failed verification ] [8]
The number of unicorns worldwide has more than doubled since 2015 with a total of 87 at the end of 2015 and 208 at the end of 2016. After doubling from 2014 to 2016, the number of unicorns peaked and 2016 saw a dip relative to 2015 of 21 unicorn startups, 21 out of 208 representing a decline of more than 10%. The total valuation dropped from $1.3 trillion to $761 billion signifying a 41% decrease in value in the startup economy. The warnings and risk mitigating attitude led by prominent sources in the venture capital industry such as Y Combinator and Andreessen Horowitz have led to more strictly measured investment strategies. [9] [10]
The United States has the largest startup economy in the world with over 400,000 new companies created each year which makes it the most susceptible and the driver of the startup bubble. [11] [12] 14% of Americans in the labor force work for small or startup businesses. Startup studios have seen an explosion of growth in the past few years, with over 200 startup studios founded across the globe (and counting). Startup studios have accounted for the success of many well-recognized startups such as Dollar Shave Club, VacationRenter, Hims&Hers, and more. [13] A shrinkage of this sector of the economy would impact 27 million Americans. While these numbers mean that entrepreneurship has brought about millions of jobs and has strengthened the US economy relative to the rest of the world, the size of the sector means that the Unicorn Bubble could harm millions of employees. [14] [15]
The Asian startup ecosystem is the fastest-growing in the world. $42 billion were invested by venture capital firms and the main entrepreneurship hubs in India and China had 10% growth in startups and 50% growth in venture capital activity respectively. [16] [17] The US is investing dozens of billions into Asian startups and vice versa. Given the global flow of startup investments, a slowdown in the US or Asian startup world will cause a slowdown for the other region as well. [18] [19]
If the startup ecosystem and venture capital industry are indeed in a bubble, the collapse of the bubble would come about due to underperformance of unicorns invested in, leading to reduced profits for venture capital companies. The reduced profitability will lead to less means and inclination of investors to fund startups and an overall less startup-friendly economy. Primarily, this will hurt the startups and venture capital institutions as well as their employees. However, less investment and less interest in founding new companies will also hurt worldwide economic growth and innovation in the near future. [20] [21]
Increased moderation in funding from venture capitalists and angel investors as well a focus on frugality from startup teams are widely accepted as a solution the startup bubble. The underlying reason for the bubble lies in rapidly rising average valuations and funding activities, while most startups remain unprofitable. This cannot be changed. Most startups will always be unprofitable at the point of funding and use funding to increase revenues and more importantly profitability. However, it is possible to reduce risk for venture capital companies and mitigate factors contributing to the bubble by being less generous in deal sizes and using stricter measures when providing valuations. In addition, reducing burn rates is key to startups' overall stability and ability to live up to expectations. [22] [23]
A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses including self-employment and businesses that do not intend to go public, startups are new businesses that intend to grow large beyond the solo-founder. During the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to become successful and influential.
Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc.. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capitalists take on the risk of financing start-ups in the hopes that some of the companies they support will become successful. Because startups face high uncertainty, VC investments have high rates of failure. Start-ups are usually based on an innovative technology or business model and they are often from high technology industries, such as information technology (IT), clean technology or biotechnology.
Index Ventures is a European venture capital firm with dual headquarters in San Francisco and London, investing in technology-enabled companies with a focus on e-commerce, fintech, mobility, gaming, infrastructure/AI, and security. Since its founding in 1996, the firm has invested in a number of companies and raised approximately $5.6 billion. Index Venture partners appear frequently on Forbes’ Midas List of the top tech investors in Europe and Israel.
An angel investor is an individual who provides capital to a business or businesses, including startups, usually in exchange for convertible debt or ownership equity. Angel investors often provide support to startups at a very early stage, once or in a consecutive manner, and when most investors are not prepared to back them. In a survey of 150 founders conducted by Wilbur Labs, about 70% of entrepreneurs will face potential business failure, and nearly 66% will face this potential failure within 25 months of launching their company. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital and provide advice to their portfolio companies. The number of angel investors has greatly increased since the mid-20th century.
Accel, formerly known as Accel Partners, is an American venture capital firm. Accel works with startups in seed, early and growth-stage investments. The company has offices in Palo Alto, California and San Francisco, California, with additional operating funds in London, India and China.
Venture debt or venture lending is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can complement venture capital and provide value to fast growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to give as collateral. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default, although this is not always the case.
Venture capital in Israel refers to the financial capital provided to early-stage, high-potential, high risk, growth startup companies based in Israel. The country's venture capital industry was born in the mid-1980s and has rapidly developed. Israel currently has more than 276 active venture capital funds, of which 71 are international VCs with Israeli offices. Israel's venture capital and incubator industry plays an important role in the booming high-tech sector that has been given the nickname "Silicon Wadi", considered second in importance only to its Californian counterpart, the Silicon Valley.
Andreessen Horowitz is a private American venture capital firm, founded in 2009 by Marc Andreessen and Ben Horowitz. The company is headquartered in Menlo Park, California. As of April 2023, Andreessen Horowitz ranks first on the list of venture capital firms by assets under management, with $42 billion as of May 2024.
Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.
Wise PLC, previously known as TransferWise, is a financial technology company focused on global money transfers. Headquartered in London, it was founded by Kristo Käärmann and Taavet Hinrikus in January 2011. As of 2023, it offers three main products: Wise Account, Wise Business, and Wise Platform.
Valar Ventures is a US-based venture capital fund founded by Andrew McCormack, James Fitzgerald and Peter Thiel in 2010. Historically, the majority of the firm's investments have been in technology startups based outside of Silicon Valley, including in Europe, the UK, the US and Canada. Valar Ventures originally spun out of Thiel Capital, Peter Thiel's global parent company based in San Francisco, and is now headquartered near Madison Square in Manhattan. The firm's namesake is the Valar of J. R. R. Tolkien's legendarium, who are god-like immortal spirits that chose to enter the mortal world to prepare it for their living creations.
In business, a unicorn is a startup company valued at over US$1 billion which is privately owned and not listed on a share market. The term was first published in 2013, coined by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.
Aileen Lee is a U.S. venture capital angel investor and co-founder of Cowboy Ventures.
Greenhouse Software is an American technology company headquartered in New York City that provides a recruiting software as a service. It was founded in 2012 by Daniel Chait and Jon Stross, two Class of 1995 graduates from the University of Michigan.
Oddup is a data-driven research platform that provides analytical information on startups, their trends, and both current and expected future valuations. It is self-styled as The Startup Rating System and the company states its vision is to disrupt equity research in private companies.
Financial technology is an industry composed of companies that use technology to offer financial services. These companies operate in insurance, asset management and payment, and numerous other industries. FinTech has emerged as a relatively new industry in India in the past few years. The Indian market has witnessed massive investments in various sectors adopting FinTech, which has been driven partly by the robust and effective government reforms that are pushing the country towards a digital economy. It has also been aided by the growing internet and smartphone penetration, leading to the adoption of digital technologies and the rise of FinTech in the country
Dataiku is an American artificial intelligence (AI) and machine learning company which was founded in 2013. In December 2019, Dataiku announced that CapitalG—the late-stage growth venture capital fund financed by Alphabet Inc.—joined Dataiku as an investor and that it had achieved unicorn status. As of 2021, Dataiku is valued at $4.6 billion. Dataiku currently employs more than 1,000 people worldwide between offices in New York, Denver, Washington DC, Los Angeles, Paris, London, Munich, Frankfurt, Sydney, Singapore, Tokyo, and Dubai.
eShares, Inc., doing business as Carta, Inc., is a San Francisco, California-based technology company that specializes in capitalization table management and valuation software. The company digitizes paper stock certificates along with stock options, warrants, and derivatives to allow companies, investors, and employees to manage their equity and track company ownership. The company also operates CartaX, a private stock exchange.
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