Many unicorn startups could become zombies

The age of unicorns may soon give way to the age of zombies.

Driving the news: These are startups that raised big cash at nosebleed prices over the past year, but which now will struggle to grow into their valuations.

• They've likely got a few years of cash runway, so won't be taking new venture funding that would feel offensively dilutive.
• The ultimate outcome could be a lot of private equity rollups, assuming the bulls are settling in for an extended hibernation.

"These zombie companies aren't going to shut down, because they're real businesses, and maybe they get extra time to figure some things out," says Justin Fishner-Wolfson, co-founder of 137 Ventures. "But they're not going to be worth anything to a lot of their [later-stage] investors, at least until the private equity guys show up."

For zombie companies, a big challenge will be maintaining morale among employees who’ve become accustomed to rising equity values. And in recruiting new talent when stock options are no longer a golden ticket.

• There also could be some layoff waves, particularly if management teams based 2021 hiring on the assumption of 2022 VC raises at higher valuations.

For VCs, there could be some very tough talks with limited partners. Even though most venture funds don’t mark-to-market, there are enough crossover investors who do — and LPs pay attention.

The bottom line: Things have changed, and both sides of the startup funding equation must adapt to a new normal.