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Edward Stanley, from Morgan Stanley, has spent more time than most people thinking about unicorns getting massacred.
The bank’s European head of thematic research is back at it again today, with a note spectacularly titled . . .
. . . that paints a pretty grisly picture for the four-leggèd billion-dollar-valuèd businesses. He writes (with colleague Mathias Vorum):
Most unicorns have less than 2 years of cash runway. Over half of these companies were last valued when rates were below 1%, and 90% last marked below today’s interest rate. Something’s (still) got to give.
The potential damage is large. Many of the best unicorns are now failing the “rule of 40” (growth rate + profit margin should be >40 per cent) test, says Stanley, with the overall pass level now the lowest in two years:
Job cuts and shutdowns are also widespread, with the number of start-ups going shut-down steadily creeping higher (Stanley’s series on this only goes back to 2019, so it’s hard to compare with other slowdowns).
Visibility on valuations is also poor:
It is not atypical for companies to avoid publicising the implied valuation at the point of doing a capital raise. There are many reasons to avoid disclosing valuations such as employee engagement, churn or competition dynamics. However, it is notable that in 2023 YTD, the number of private companies advertising post-money valuation figures is lower than at any point over the past two decades. If we mark-to-market the US unicorn grouping to the latest secondary transaction prices then the aggregate group valuation would have fallen by 44%.
Add in more signs of problems, or problems being hidden:
— diminishing cash runways
— stale valuations
— waning momentum in the creation of new unicorns
. . . and things look pretty unhappy for the hornèd herd.
Widespread writedowns, which Stanley suggests are an inevitability, would result in both a unicorn massacre and lead to a lot of value destruction. Here are Morgan Stanley’s projections:
It’s difficult to read from the chart there, but the super-downside scenario modelled, in which valuations take a 90 per cent haircut, would leave just 37 unicorns left. Or, rather, just 37 horses keeping their horns.
A 50-per-cent haircut — which “secondary markets are effectively telling us is the correct level of re-pricing”, say the strategists — would eliminate about 300 unicorns, and wipe out some $1.1tn of value. They add:
In the scenario where the above conditions and cash runway persist, this could potentially unfold over the coming 12 months.
Ouch. Get those tin hats (with a little hole for the horn to poke through) on!