Jun 13, 2022 - Economy & Business

Shocks to the unicorn system

Illustration of a melting ice cream cone, but the cone is a dollar bill.

Illustration: Maura Losch/Axios

If you're looking for sunshine, you've come to the wrong place.

  • Over the past month, my conversations with private market investors have become progressively bleak. This culminated last night when a veteran source put his finger on why this is really different from 1999: Scale.

By the numbers: Private markets AUM hit $9.8 trillion through July 2022, which is up from just $7.4 trillion one year earlier, with over $2 trillion held by venture capital firms.

  • In 1999, U.S. startups raised around $47 billion. Last year they topped that during several individual months, raising a total of $330 billion.
  • Neither macro economic growth nor inflation can explain away those numbers.

Why it matters: The private markets are more critical to the broader economy than they were in 1999, or during the Great Financial Crisis a decade later. Which means the fallout could be messier.

  • Pain so far has been mostly localized to valuations, but soon it could hit income statements. Consumer spending power is flagging due to inflation, and corporate layoffs mean that enterprise tech contracts will include fewer seat licenses.
  • VC funds will need to pick winners and losers, and some younger partners may be tempted to throw good money after bad (to keep their career-making "wins" afloat). Including in crypto, which no longer seems immune to the downturn. Oh, and LPs are over their paper gains.

Many startup CEOs seem late to recognize that valuations based on slight discounts to "future growth" may be this generation's "eyeballs" metric, perhaps believing this is just a blip that they have enough cash to survive.

  • Incumbents are certainly looking for devalued acquisition targets, but they'll be highly selective. Or as my conversant last night said: "Big companies don't want to buy new problems."
  • Yes, new VC rounds are still being signed and announced. But a lot of the larger ones are highly-structured, which rarely gets announced externally or internally.

It's also rough waters ahead for leveraged buyouts whose debt usually is tied to floating rates (new deals may be a different animal, relying more on private credit).

Forward guidance: The Nasdaq opened this morning down around 2.7% and the Dow opened down around 1.7%. The S&P 500, as of this writing, is back in a bear market.

The bottom line: 2022 isn't about a single shock. It's about rolling, successive shocks that could interact with one another in crushingly unpredictable ways.

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