Softbank chief executive Masayoshi Son has warned the ‘unicorn winter’ will be longer than necessary unless founders take a haircut on valuations, as data shows start-ups are losing value in their latest funding rounds.
Start-ups with highly sought-after valuations of more than US$1bn, known as ‘unicorns’, emerged nearly a decade ago as venture-capital funds began to recover after the dotcom crash.
Unicorns have struggled to sustain high valuations this year, particularly in the fintech space, amid recent market turbulence that has made listing on the stock market a less attractive exit route for investors.
“Historic levels of inflation and steep interest rate increases have driven a serious repricing of valuation multiples for unprofitable, high-growth companies, as future cash flows look much more uncertain and less valuable,” said Pitchbook senior analysts Cameron Stanfill and Kyle Stanford.
Japanese conglomerate Softbank blamed fluctuations in the valuations of its investments for a record net loss of US$23bn in the second quarter as its flagship fund was hit by a sell-off in tech stocks.
In the second quarter of 2022, venture capital investment in fintech companies fell 17.8% quarter on quarter, the largest percentage drop since the third quarter of 2018, according to Pitchbook.
Median valuations of fintech companies dropped 40.6% during the quarter to US$153mln, the data provider said, while exits stalled as initial public offerings ground almost to a halt.
According to Pitchbook data, the number of new unicorns dropped to eight valued at US$9.8bn in July, from 31 at US$57.7bn the previous month, the lowest monthly number since the jaws of the pandemic in June 2020. This was down from a high of 64 new unicorns at US$139.1bn in September 2021.
As of June 2014, there were more than 1,200 active unicorns, according to Pitchbook.
Start-ups are now having to exploit company levers such as executing funding rounds less frequently and cutting headcount to sustain valuations.
Such measures have become necessary, Pitchbook said, “as they try to grow their financials to match the valuations of their latest round in the face of much lower multiples.”
Payment start-up Stripe, which according to Pitchbook was one of the three largest unicorns in the world, is among the so-called unicorns that have taken a haircut on its valuation this summer.
In July, Stripe took a 28% cut on the internal valuation of its shares, the Wall Street Journal reported.
Klarna also confirmed last month its valuation was slashed 85% from US$45.6bn to just US$6.7bn after a US$800mln funding round in which it raised capital from the likes of Sequoia, Silver Lake and the Canada Pension Plan Investment Board.
Pitchbook described Sweden-based payment platform Klarna’s haircut as “indicative of the challenges facing the [Buy Now Pay Later] space”.
Sequoia partner Michael Moritz said the payment platform had taken a haircut “due to investors suddenly voting in the opposite manner to the way they voted for the past few years”.
Shares in listed fintech companies similarly plunged, with buy-now-pay-later platforms Affirm Holdings and Zip Co Ltd (ASX:Z1P)’s shares tumbling by as much as 61% and 71% this year respectively.
Pitchbook said: “Macroeconomic conditions and high inflation pushed the Fed to raise interest rates, which has pushed down equity prices, especially for companies whose value is based on growth.
“This massive reset of valuation multiples in the public markets has spooked potential new issuers, as start-ups and investors must consider current market conditions if IPO plans are on the table.”
Initial public offerings in Europe hit a ten-year low in the first half of 2022. The total amount raised from debut stock markets listings in Europe in the second quarter totalled €2.1bn, less than a tenth of the €23.1bn raised from IPOs in the equivalent part of 2021, according to PwC’s IPO Watch Europe Q2 2022.
“The London IPO market was largely closed in Q2 with only 3 IPOs raising £0.2bn compared to 20 IPOs raising £2.6bn in Q2 2021,” PwC said in a statement.