A creature known in antiquity for its rarity, unicorns are becoming rarer in the present day as well.

Billion-dollar company creation has declined sharply year-over-year, with only 308 private startups crossing the threshold in 2022 through November, compared to 596 overall in 2021, according to PitchBook data. While this is still the second-highest annual total in recent years, the latter half of this year has seen a definitive slowdown in growth for the segment.

Ever since the high-water mark of Q3 2021, quarterly unicorn creation has been trending downward, with 42 such companies minted in Q3 2022 and 21 in Q4 as of Dec. 1, both in line with the pace set in 2018 and 2019.

The cumulative valuation at point of creation for unicorns minted in 2022 is more than $556 billion, second only to 2021's total of $1.2 trillion. The average and median valuations for new unicorns in 2022 were $1.8 billion and $1.6 billion, respectively, both second to 2021.  

Valuations under pressure

The big story in 2022 was the rise, and in some cases the fall, of crypto—and that was evident in the ranks of the companies that became unicorns this year.

Of this year's newly minted unicorns, four of the top 10 most valuable startups are crypto or fintech companies. KuCoin, a Seychelles-based cryptocurrency exchange platform, is the most valuable company on the list.

However, it's not all rosy for billion-dollar crypto startups. Bahamas-based cryptocurrency exchange FTX rapidly and publicly collapsed, filing for bankruptcy Nov. 11. The sudden implosion of what had been one of the industry's biggest companies showed how quickly fortunes can change, especially in crypto, and how fragile the unicorn designation can be.

Recent interest rate hikes by the US Federal Reserve have hurt the stock market as well as the rate of unicorn creation and valuations, although unicorn valuations have not declined as much as the stock market. 

Under these conditions, the unicorn herd is facing possible thinning. Roughly a quarter of all billion-dollar startups have a valuation of less than $1.2 billion, meaning these companies are at risk of losing the designation. For unicorns minted this year, the share of companies with a valuation under that threshold is at 37%.  

Flight to safety

Amid this global economic uncertainty, investors are sticking with safe bets, favoring North American unicorns, specifically in the United States, and reducing exposure to those based in Asia.

More than 60% of unicorns minted so far in 2022 were based in North America, roughly the same proportion as in 2021.

Regulatory uncertainty in China appears to have taken a toll on the formation of Asian unicorns, which took a dive YoY, declining to about 18% in 2022 from nearly 25% of all unicorns minted a year ago.  

Investors' flight to safety also occurred at the industry level. IT startups made up the majority of unicorns minted in 2022, increasing their share from 2021. On the other hand, after two years of growth, the share of billion-dollar healthcare startups has fallen, possibly due to the pandemic receding from daily life in much of the world.

With energy prices on the rise globally, companies in the energy industry have made up a larger share of the 2022 unicorn class, at 2.9% of all unicorns minted this year compared to 0.5% in 2021.

While economic conditions have created headwinds for new unicorn creation, they have also accelerated existing trends. The share of consumer products and services unicorns has declined for the fifth straight year, with startups in that industry making up only about 10% of unicorns minted in 2022, down from 35% in 2017.

IT startups not only made up the majority of unicorns minted in 2022, they also generated the most value upon becoming unicorns, according to the data, making up nearly 60% of the total value this year. Software was the largest subsegment among newly minted unicorns, making up more than half of all unicorns in the 2022 class.

Related read: Morningstar PitchBook Global Unicorn Indexes

Featured image by Arina P Habich/Shutterstock

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