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Relentless pursuit of unicorn status leads to unhealthy balance in VC

The venture funding arms race that over the last few years has drawn companies to raise larger and larger rounds, creating a hold behind the $1 billion+ valuation bucket.


The venture funding arms race over the last few years has drawn companies to raise larger and larger rounds, even when they haven’t necessarily needed the money. Take Slack for example—after the company raised its first unicorn round in October 2014 (at which point it said it didn’t need the money), Slack CEO Stewart Butterfield stated, “One billion is better than $800 million because it’s the psychological threshold for potential customers, employees and the press,” when asked about the company’s new valuation.

This pursuit of unicorn status has created a hold behind the $1 billion+ valuation bucket. One would expect a much different distribution of U.S. company valuations than what is seen in the chart above. It would seem normal to have many more companies in the $500 million to $999 million bucket, waiting for the next financing—or better yet, an exit—to make the jump to a billion-dollar valuation. But there are just 17 more companies situated between $500 million and $1 billion than there are valued at $1 billion+.


The crippling problem here is the current lack of exit opportunities, or even follow-on financing opportunities for the unicorn bucket as a whole. Some of the companies can undoubtedly generate enough revenue to stay private for some time without raising a new round, but investors are sure to clamor for an exit at some point.

“In 1999, record valuations coexisted with record IPOs and shareholder liquidity. 2015 was the exact opposite. Record private unicorn valuations were offset by increasingly fewer and fewer IPOs. If 1999 was a wet (real liquid) bubble, 2015 was a particularly dry one. Everyone was successful on paper, but in terms of real cash-on-cash returns, there was little to show.”-Bill Gurley.

Driving for valuation is a good course to chart for a company, but as we’ve seen in the past, a down valuation at exit will hurt at least some of the company shareholders and employees. The hubris and “growth at all costs” attitude has led many companies/investors to skip prudence and put the venture market into a dangerous, top-heavy situation.

  • kyle-headshot-8-667x560.jpg
    Written by Kyle Stanford

    Kyle is an analyst at PitchBook, focusing on venture and carrying a particular interest in the early stage. He graduated from the University of Washington in 2009, earning a degree in history. He joined PitchBook in 2014 as a writer for the VC newsletter and a contributor to the blog.

    Born and raised in the Pacific Northwest, Kyle enjoys everything outdoors and doesn’t mind rain.

    After spending time working in the daily deal industry after college, he spent a year traveling his way around the world. His passport, which needs to be replaced, holds stamps from 30 countries.

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