What causes the “unicorns” valued at billions of dollars to drop dramatically after just a few years?

Crunchbase points out that many startups are quickly joining the group of “unicorns” that are gradually “failing”. A good example is Clubhouse, the audio social networking platform that became a phenomenon in 2021 when Covid-19 forced many people to isolate at home.

As downloads surged, investors poured more money into the app as well. Launched in 2020, Clubhouse completed a Series B funding round in April 2021 at a valuation of $4 billion.

However, since then, Clubhouse’s activities have declined. This project is still maintained but not as exciting as before. According to AppBrain, the app ranks 67th in the social networking category on Google Play in the US. Crunchbase said that Clubhouse laid off a lot of employees in June 2022.

In addition, fast delivery services like Gorillas and Jokr also have breakthroughs and then falter. Gorillas was founded in 2020 in Berlin (Germany), has raised nearly 1.3 billion USD in 2021 with a valuation of about 3 billion USD. Recently, the company caused a stir when it laid off staff, pulled out of many markets and announced its focus on reducing spending.

Besides, fast delivery service provider Jokr was just established in 2021 but has raised $ 430 million. This has made the company one of the fastest tech unicorns on the market. However, recently, Jokr also announced to stop operating in New York and Boston (USA) to focus on the Latin American market.

Pricing higher than the market

According to Crunchbase, at times, venture capitalists charge a company higher than the market average.

This is also the case with Bird, an electric scooter rental platform, which became a unicorn in 2017 just a few months after its launch. In the following years, the company’s branded scooters appeared in major cities in the US.

In May 2021, Bird announced the merger of SPAC with an initial valuation of $2.3 billion. However, Bird’s value plummeted shortly after closing the deal in November 2021. As of now, Bird’s stock is only priced at 36 cents a share.

Desktop Metal, the 3D printing company, is also valued at unusually billions of dollars and is struggling in the market. Currently, the market capitalization of Desktop Metal is around $800 million. This isn’t a low value, says Crunchbase, but is certainly much lower than the company’s previous valuation.

Fast development but unsustainable

According to Crunchbase, 2021 is the year that sets an all-time record for startup investment when many startups rise to “unicorns” with billions of dollars in valuations in just a few months or a few quarters.

Crunchbase also pointed out that the reason these startups did not grow well after receiving the investment was because the company was founded based on the needs and market trends during the pandemic. But this market trend is showing signs of recession.

For example, Hopin, a virtual events management platform launched in 2019, has raised $1 billion in 2020 and 2021. The platform’s peak valuation is up to $7.75 billion. However, a year later, Hopin also had to make an announcement to reduce staff and many activities. In July 2022, the London headquarters laid off 29% of its staff.

Another example is Thrasio, a startup that specializes in acquiring third-party brands on Amazon, then continuously integrating and optimizing operations. The startup was founded in 2018 and has raised $2.2 billion in equity and $1.2 billion in debt by the end of 2021 to fuel growth.

But then the company’s fortunes changed. In May 2022, Thrasio laid off a series of employees. The company’s planned IPO with a $10 billion valuation was also delayed as the growth rate of US e-commerce slowed.

In addition, Pacaso, a startup specializing in providing the service of buying shares of resort real estate, was also included in the list of “unicorns” after only 5 months of launch. However, the real estate market in the US also has many rapid changes when mortgage interest rates rise sharply.

According to Crunchbase, the stories above show many unicorns growing hot but not sustainable. Creating buzz and high valuations at an early stage is no guarantee of a company’s long-term success in the future. If following the trend, startups should ensure this is a long-term trend and not a temporary adaptation caused by the epidemic.

However, Crunchbase points out undeniably that many transformational companies or founders are recognized early on. Take Apple, for example, which was launched in 1980 and became profitable after only four years with a product. Or Google just took a few years to dominate the search engines.

Reference: Crunchbase