Today there are over 1,000 private companies valued at $1 billion or more by their investors. In fact, about one and a half unicorns are born a day. But that wasn’t always the case, and we don’t think it was the intention.
When the term unicorn was originally coined 10 years ago, it provided a vaunted distinction for the 14 privately owned startups valued at $1 billion or more at the time; and only four unicorns were added annually. At the time, it was an exceptional achievement and a true proxy for success that signaled to customers, partners, employees and the media that this company needed to be taken seriously as it was likely to continue to exist.
The list included Palantir, Pinterest, Uber, Square, and Airbnb, all of which are still active influencers of how we live and work. But even the original unicorn list had some companies that didn’t stand the test of time quite as meaningful, like Fab.com.
Fast forward to today, and the spread of unicorns has spiraled out of control. Thanks to a 13-year bull market that propelled software IPO and M&A results to new heights, and an abundance of capital in the venture ecosystem, proprietary software valuation multiples have skyrocketed.
As investors rationalized a way to insure outcomes up to 30x, 40x, 50x+ multiples, the once-rare multi-billion dollar valuation became commonplace and unimportant. As we highlighted in Bessemer’s 2021 Cloud 100 Benchmarks report, the average entry multiple for a top cloud company increased from 9x annual recurring revenue (ARR) in 2016 to 34x in 2021. This dynamic has led to this misconception about unicorn size. .
Unicorns can be illusions, often appearing much larger than they actually are. At a multiple of 34x ARR, a company only needs $29 million in ARR to achieve unicorn status. For a company with an ARR of $29 million growing at 100%, a multiple of 34x ARR also equates to a multiple of 45x current revenue ($22 million in GAAP revenue at mid-year accounting).
Where a $1 billion valuation was once a distinction, it is now prosaic.
Venture investors properly use ARR to evaluate the performance of private cloud companies to reflect their rapid growth rates. However, the ARR metric overestimates revenue by calculating annual contract values on an annual basis and giving the company annual customer retention.
While hitting $29 million ARR is a stellar achievement, over the BVP Nasdaq Emerging Cloud Index, the average LTM GAAP yield at the time of IPO was a whopping $170 million. In other words, many top cloud unicorns still have the formidable undertaking to grow their revenue another 7x to hit the average IPO scale.
In recent years, investors and startups have been able to justify all of this by pointing to public market multiples attributed to cloud dollars. The increase in multiples from 9x to 34x suggests that private markets found every $1 in revenue from a top cloud company 4x more valuable in 2021 than in 2016, and public markets largely played a part.
But do dollars actually become real? That much more valuable? The recent market correction suggests not. The average public cloud multiple has only increased to 13x in 2022 YTD from 11x in 2013 (median from 7x to 10x). So while cloud dollars are more valuable than before – driven by high growth sustainability and predictability – they are not valuable enough to rationalize the rise in private market entry prices that could crown a unicorn with $29 million ARR.
With this market correction (and sticking to the horse metaphor), we’ll see some unicorns strolling into the sunset and others being sold for slaughter. While in the past both entrepreneurs and investors have strived to achieve “unicorn status” as an imperative of success, it is no longer a proxy for market leadership, quality standards or sustainable stamina – as recent headlines attest. The only thing we can confidently conclude about a unicorn today is its ability to raise money during the frothiest period of the past decade.