The new unicorn litmus test

Hello from America, where we are digesting some pretty big news. Given the portent and weight of what’s going on today, it may feel a bit weird to sit down and read about billions of dollars of someone else’s money. But this is a technology startup and financial news site. So, to work. Just know that our hearts are where yours are.

Zendesk agreed to sell itself to an investor collective for $10.2 billion earlier today. An 11-figure sale of any company is notable, but in the case of Zendesk, it’s not for the reasons you might initially expect.

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You see, Zendesk turned down a $17 billion offer earlier this year. TechCrunch at the time somewhat agreed with that choice given its then-relatively low implied revenue multiple. Fast-forward a bit more than a quarter and, under pressure from a falling stock price, Zendesk is out the door for far less than it could have accepted earlier in 2022. Our first-read analysis was that the news was bad for the more than 1,000 unicorns chewing their cud on the private market, waiting for the IPO window to reopen and market valuations for software companies to rebound.

But what portion of the unicorn horde is actually ready to go public? Not a big one. And of those that aren’t, you know, ready to go public, what portion of those unicorns are really worth their paper price? That’s our homework for today. Follow along for some relaxed Friday math-based theorizing.

10, 100, 1000

Data from Bessemer growth-stage investor Mary D’Onofrio indicates that unicorns that have reached the $100 million annual recurring revenue (ARR) mark are rare. About one in every six unicorns has reached the revenue threshold, which means that a mere 17% of unicorns could defend a $1 billion price tag at a 10x multiple.

In some sense, these are the real unicorns, as they have reached IPO scale and are still growing. They will be able to go public at some point, likely for $1 billion or more.

But that fact leaves five out of every six unicorns in doubt. How many of those are worth $1 billion? Not very many. How can we say that with confidence? The following, via Altimeter’s Jamin Ball: