Distinguished from their predecessors by more niche technologies and diverse origins, newer venture capital-backed tech startups are multiplying rapidly.
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Well fed by eager venture capitalists, privately held technology startups valued at $1 billion or more are becoming increasingly common. In less than a decade, they have grown in number from roughly a dozen to a herd of about 750, worth over $2 trillion combined. In the first six months of 2021, nearly $300 billion in investment poured in, adding 136 new unicorns between April and June – a quarterly record, according to CB Insights. The number of funding rounds exceeding $100 million tripled compared to the same period last year.
The new unicorns attracting the most investment are different from the previous generation. While marketplaces that match consumers with services à la Uber were white-hot, many of the current frontrunners are firms that have or are developing advanced technologies, often in niche markets. About 25% of the second-quarter bonanza went to fintech. Artificial intelligence, digital health and cybersecurity also fared well.
These startups are also more geographically diverse. American and Chinese startups are still on top, but the share from outside the world’s two largest markets grew from about 25% in 2016 to 40% in the past quarter. Indian e-commerce firm Flipkart raised $3.6 billion in a round that valued it at $38 billion. Singapore’s Grab, an app that offers ride hailing, food delivery and payments, is looking to go public in New York this year at a valuation of $40 billion.
Various forces are driving the surge in venture capital going to unicorns, both old and new. One is a divestment spree on the part of early VC backers with stakes in firms related to digitisation. Another is a spate of exits via public listings and acquisitions, which more than doubled year on year. The Economist reports that the proceeds are flowing back into new VC funds. Competition from non-VC technology investors, such as pension funds, sovereign-wealth funds and family offices, has helped push valuations sky high. These investors have been moving into private markets once controlled by venture capital firms.
Will this torrent of investment ultimately yield rich returns? Many newer unicorns continue to operate at a loss; the rest may or may not live up to their valuations. Further, the new unicorns differ in yet another respect that makes them less predictable. While their predecessors tended to focus primarily on growth, these startups aim to attain good margins by selling unique technologies. This could be a more sustainable model, but success hinges on whether the technology actually works. Considering much new tech is still at the prototype stage, this remains to be seen.