Unicorn valuations were cut by 80%, and they opted to snipe in the seed round

Wen 丨 Zhang Xue

Editor丨Zhang Lijuan

Source丨TouZhong.com

Is 2023 the best year to invest in recent times? Perhaps a month ago, we could not answer this question.

But now, with the intensive investment activities, the close travel arrangements of investors, and the rise of new technologies and projects, we are beginning to believe that this year is indeed a good year.

In fact, new changes in the market further confirm this judgment, especially in the US market.

There are three main driving factors behind this, first, after the adjustment of the entire venture capital market valuation system in 2022, many quasi-unicorns and unicorn companies in the United States, especially in the SaaS and other fields, have seen a significant decline in corporate valuation, and are getting closer to bottoming, and 2023 is an opportunity to dig into a good project. Secondly, the wave of layoffs in Silicon Valley and the rise of new technologies such as ChatGPT and B2B have provided new blood and ideas for the startup market, and many investors have begun to look for seed round opportunities; Finally, relevant data show that the amount of funds raised in the US venture capital market hit a new high in recent years last year, but the number of shots by institutions has decreased significantly, and it can be said that institutions do not lack investment "ammunition".

Unicorns for low prices

The latest report shows that in terms of revenue and market potential, only 50% of unicorns in the current market are worthy of the name, while the real situation of the other half is the continuous decline and contraction of valuations.

Companies like Gett, for example, were valued at $2.5 billion but have now dropped to $265 million. Another company, cryptocurrency company Celsius, which fell off the unicorn list in 2022, raised money at a valuation of $3 billion in 2021.

In addition, since Q3 2022, the valuations of the vast majority of US super unicorns have at least been adjusted back to the level of the previous round. Even the world's top ten exclusive beast companies have not been spared, and exaggeratedly even experienced a valuation shrinkage of more than 30%.

One investor noted, "That's the reality for unicorns right now, they need money to grow, and it's going to take a long time to get some profitability." But their valuations for the market will be cut by 70%, 80% or even 90%. ”

Investors prefer to call it the new normal of valuation, where there will be many parity, markdown, or internal rounds, and startups' founders, CEOs, and boards of directors will need to accept the pain of this new valuation structure.

At the same time, the further reduction of the number of unicorn companies has also become an industry consensus. In addition to the active exit of unicorns, the valuations of some quasi-unicorns currently in Series C and Series D will see more declines, because these companies are currently the most underfunded and more passive in financing.

Of course, even so, more unicorns are looking forward to being able to start more next rounds of funding, mergers and acquisitions, and even IPOs in 2023.

But everyone is not optimistic about this, and there is no doubt that on the IPO side, the valuation of most companies will also be greatly reduced. According to Correlation Ventures, with a few exceptions, venture capital investments in unicorn companies did not translate into excess venture investment returns. "Of the unicorns that have exited over the past decade, the majority (62%) of investors have returned less than 10 times."

Jules Walker, senior director of business development at KPMG in the US, also told the media: "Many unicorns in the United States will face challenges in the first quarter of 2023, and investors will have more initiative. And unicorns looking to raise capital may need to give up a lot of things besides valuation. ”

Similarly, previously, M&A exits, which were not valued by many companies, are also expected to set off a new wave in 2023, after all, after a difficult year in 2022 for technology stocks, some technology unicorn companies will take M&A exit as a new option in the face of a friendlier valuation environment given by industry parties and institutions.

New technologies are on the rise, reproducing the feast of high-reward seed rounds

Unlike unicorns, which can't hold up valuations, 2023 saw growth in early-stage investments. One figure is that the U.S. market has completed nearly 70 early-stage project financings so far this year alone.

Seed investment, in particular, is believed by more than one investor to dominate the investment market in 2023. PitchBook also noted that the valuation and deal size of seed-stage startups will continue to rise in 2023, reaching new annual highs.

Much of the financing of early projects stemmed from insecure investors, who like to learn from history, because in their view, both during the tech bubble of 2000 and during the crisis of 2008, a number of excellent high-tech companies were born. Now they're also willing to turn their attention to early-stage companies that are just entering the market.

Shahar Tzafrir, Managing Partner of TLV Partners, said: "2023 should be a fantastic year for venture capital firms that have been focusing on seed-stage investments. More early-stage startups will continue to emerge and are likely to have stronger founders. In difficult times, only the stronger founders have an uncontrollable urge to jump into the water and start new startups. ”

At the same time, we see that the necessary conditions to support the explosion of early-stage projects seem to have been assembled: talent, new technology, and capital.

In the U.S., almost all big tech companies have laid off jobs, and the entire industry seems to be falling apart. Tens of thousands of high-tech talents have fallen from the high salaries of tech giants, and this group of people is also seen as a new force for entrepreneurs. Especially during the explosion of new technologies like ChatGPT.

According to CB Insights, investors poured $2.6 billion into 110 U.S.-focused startups focused on generative AI last year. Another staggering number is that just five days after ChatGPT launched, 1 million people used ChatGPT — which is about 60 times faster than Facebook reached 1 million users.

No one can deny that ChatGPT's "gold rush" may be unprecedented and will go far beyond generative artificial intelligence.

It is reported that in addition to the people who have been laid off, cryptocurrency practitioners who have recently cooled down quickly have also joined the wave of generative AI. While AI may be another hot spot for hype, it's clear that talent and money are migrating from tech giants, Web3 startups, and more.

We also see that in addition to the tide of AI entrepreneurship, after long-term growth is king, many large companies in the United States are forced to control costs and improve their focus on efficiency, and this explosion of demand also provides new ideas for B2B entrepreneurs, and it is foreseeable that tool software will also become a new hot track in the future.

Many practitioners in Silicon Valley agree, arguing: "Given the number of layoffs in the U.S. tech industry, especially in Silicon Valley, talent will be an area to watch in the coming quarters as we see a new batch of startups starting to emerge." ”

Cautious money began to flow again

It is precisely because of this that some investors pointed out that the first-mover advantage that appeared in early 2023 is different from anything in recent memory.

Speaking about market opportunities, Buffett also pointed out that in the new cycle of the cycle we are in, now is the time to act.

From the perspective of the development of the VC industry in various regions of the United States, Silicon Valley is still the region with the most influence among all US venture capital regions, and the number of projects is also the highest.

It is worth mentioning that nearly half of the US venture capital last year went to "California-based companies."

On the other hand, in the US market, although the financing of many companies in 2022 is not ideal, and the valuation of investment and financing projects is not ideal, the fundraising of institutions in 2022 is very smooth. The data shows that the total number of VC fund fundraising in 2022 is even higher than the all-time high in 2021.

Looking back at the reasons why everyone is cautious in 2022, first, because the valuation is still in the adjustment period, second, the macro environment is full of uncertainty, and third, it may be because many founders are still immersed in the valuation bubble in 2021 and are unwilling to wake up to accept reality.

But now, optimists have taken action. Investors with abundant funds said, "We will definitely not take a wait-and-see attitude in the first quarter, we will not wait to see where the market goes; Instead, we believe that the best time to innovate is in difficult and crisis times. Therefore, we will definitely seek investment. ”

Even investment managers with return pressure can easily make a move at this time, after all, the decline in the price of high-quality projects and the rationality of valuation are unattainable.

It's important to note that deals made now are unlikely to yield huge returns in the next six months or even two to three years. Some investors believe that low prices in 2023 will bring huge returns in the next five to ten years.

"Now is the time to invest, and as the strong get stronger and the weak get weaker, great companies are built during downturns. I think 2023 is one of the most profitable years to invest in compared to previous years. Some investors said.

However, on the flip side of the coin, investors are more motivated to sell because they have more initiative and bargaining power, whether they are facing unicorns that were once a valuation ceiling or early-stage projects that have just entered the market.

And what brings them a sense of security and high profitability behind this. So, who's to say this hasn't been one of the best years for venture capital in the U.S.?