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Unicorns’ growth strategy reaching turning point

Written by Nikkei Asia Published on   3 mins read

SBG, other nontraditional investors squeeze money, prioritize profit.

The business model of unicorn companies, which prioritizes growth on the back of ample funds, has come to a turning point, as some major unicorns are struggling in the face of monetary policy tightening overseas.

The term “unicorn” was first used in a 2013 article by the US angel investor Aileen Lee, referring to privately owned startups valued at more than USD 1 billion.

While listed stocks are now in a period of winter, unicorns will see a “longer winter,” Masayoshi Son, chairman and president of SoftBank Group, said at a briefing on the company’s financial results in August.

In contrast with listed stocks, which go up and down in their daily reassessment, unlisted companies are reevaluated on limited occasions, such as when they raise funds. Son made the remark in anticipation that falls in the stock prices of high-technology companies since this spring will gradually but steadily affect unlisted stocks.

In fact, the appraised value of companies that SoftBank Group has invested in is starting to fall. Swedish “buy now, pay later” startup Klarna raised funds in July at a value 85% lower than in 2021. TikTok owner ByteDance, the world’s largest unicorn, will carry out a share buyback, estimating its corporate value at USD 300 billion or so, according to Reuters, down by up to 25% from its value assessed on the unlisted stock market last year.

Nontraditional investors like SoftBank Group and Tiger Global Management began to accelerate investment in startups around 2017, when interest rates were historically low. In particular, they spent a huge amount of funds to raise the value of companies before recovering investment in them.

But amid global inflation due to Russia’s invasion of Ukraine and following rate hikes by central banks, the investment stance of nontraditional investors has changed, data shows. The median value of startups that have raised funds in a series E round or later—that is, for at least a fifth time—was USD 2 billion in the January-June period, down from USD 2.1 billion in 2021. The number of new unicorns is also decreasing.

“We’ve had a few years now where growth has been really heavily prioritized by investors. Now, understandably, they want to see profitability,” said Klarna CEO Sebastian Siemiatkowski. The company has shifted its business toward profitability, cutting 700 jobs—10% of its workforce—and taking a tougher stance on credit management.

The number of startups forced to lower their corporate value remains relatively small. In the US, they accounted for less than 10% of those that raised funds in the April-June quarter, according to a US data provider PitchBook.

Fundraising by startups “is moving toward normalization, as they have been able to raise funds in excess of their raw power over the past few years,” said Osuke Honda, general partner at DCM Ventures, representing many investors’ calm reaction.

Undeniably, however, a drop in the appraisal of a startup lowers not only the value of shares held by founders and initial holders but also the morale of employees, who often receive shares as compensation.

Miguel Fernandez, CEO of American investment company Capchase, warned of an increase in appraisal cuts, saying it will be difficult for startups to maintain their high assessments if current market conditions continue.

Shakeouts, which only stronger companies can survive, are not necessarily unfavorable. Facebook (now Meta) was founded soon after the dot-com bubble burst in the early 2000s, and the US financial crisis of 2008 paved the way for the establishment of Airbnb.

Startups have surely entered a stage testing them for a balance between long-term growth and short-term profit.

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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