PitchBook has shared an extensive update that takes a closer look at European Unicorns (firms / startups valued at $1 billion or more).
PitchBook recently shared the following key insights and takeaways from their comprehensive research report:
Critical / important questions emerge, as 54% of the unicorn market was last valued in 2021 or 2022.
PitchBook noted in its extensive research study that the current European unicorn landscape has grown more than fourfold in the last five years, “sitting at an aggregate value of €447.0 billion.”
Since unicorn birthrates peaked back in the year 2021, however, growth has notably “slowed.”
PitchBook further noted that the market valuations have also “significantly changed” since that period, but a large part of unicorn value is still at 2021 and 2022 levels.
According to insights shared by PitchBook, both dynamics pose questions about how future aggregate value could look in Europe.
PitchBook also mentioned that the European unicorn landscape could shrink by “nearly 6% in a base case.”
Since 2021 and 2022, several players have “prolonged financing” and received a more marked-to-market valuation in a more conservatively valued market.
PitchBook explained that they model the potential downside to the European unicorn market by flexing various inputs “on the proportion that receives a down round, the magnitude of stepdowns since the peak, and the extent to which such companies benefit from the valuation recovery seen so far in 2024.”
PitchBook added that these have resulted in an adjusted value for this part of the market that implies how much is “lost when older valuations are marked to current levels.”
The researchers claim that they believe risks are skewed to the downside, where their worst-case scenario “implies nearly €100 billion of market decline.”
The PitchBook research team explained that this translates to roughly a 22% decline in aggregate value, “assuming a greater step-down since the peak years of 2021 and 2022 and no valuation recovery this year.”
On the other hand, their bull case assumes a “lower proportion” of the market will experience a down round, with “step-downs in line with the venture market and 2024 recovery greater than wider venture.” This implies nearly no aggregate market value is lost, staying flat, which is in line “with current trends, where growth rates have plateaued since 2023.”
Self-sufficiency, power law dynamics, debt, and an IPO window will add
caveats to the outcome. Their model is market-based, “meaning there are
several broad assumptions that may not play out in practice.”
PitcbBook added in its comprehensive ecosystem report that so-caled Unicorns raised a significant amount of cash during the peak years and may not be looking for external funding “at a depressed valuation, especially if self-sufficiency and organic cash flow have been achieved.”
In addition to this, given the large valuation dispersion unicorns experience between financing rounds, it is also “possible that one step-up could eclipse a market downturn in our scenarios.”
Businesses could also use other means to finance, such as debt, which does not require a “new valuation.”
Debt has already been used by 15.0% of “active unicorns to finance their latest rounds.”
All these caveats mean market value could be more resilient than expected.
the other side, PitchBook pointed out that an IPO window that favors VC-backed tech names suggests the exit from private markets could “remove aggregate value more quickly than expected.”
According to the PitchBook report, Unicorn valuation haircuts will impact the entire “venture market and its stakeholders.”
PitchBook also mentioned that their analysis provides benchmarks and a framework for founders and investors on the “magnitude of step-downs that could occur for their businesses or investments.”
PitchBook further noted that their work can also help both determine which areas of the market could produce “more successful unicorn stories based off of history.”
For LPs, this note provides those levered into venture-growth strategies “an idea of potential upside and downside risks to their allocations.”
PitchBook concluded in its latest update that “less liquidity” as well as “lower returns” mean less capital would be able to be reinvested into the venture market, which could potentially weigh considerably on the “long-term development of ecosystems.”
