Softbank chief executive Masayoshi Son has warned that the “unicorn winter” will be longer than necessary unless founders take a haircut on valuations, as data shows start-ups lose value in their later funding rounds.

Startups with highly sought-after valuations of over $1 billion, known as “unicorns”, emerged nearly a decade ago as venture capital funds began to rebound after the dotcom crash.

Unicorns have struggled to maintain high valuations this year, particularly in the fintech space, amid recent market turmoil that has made going public a less attractive exit route for investors.

“Historical levels of inflation and sharp increases in interest rates have prompted a serious reassessment of the valuation multiples of unprofitable high-growth companies, as future cash flows appear much more uncertain and less valuable,” they said. Cameron Stanfill and Kyle Stanford, Pitchbook Senior Analysts.

Japanese conglomerate Softbank blamed fluctuations in the valuations of its investments for a record net loss of $23 billion in the second quarter, as its flagship fund was hit by a sell-off in technology stocks.

In the second quarter of 2022, venture capital investment in fintech companies fell 17.8% quarter-on-quarter, the biggest percentage drop since the third quarter of 2018, according to Pitchbook.

Median valuations of fintech companies fell 40.6% in the quarter to $153 million, the data provider said, while outflows stagnated as initial public offerings nearly stalled.

According to data from Pitchbook, the number of new unicorns fell to eight valued at $9.8 billion in July, from 31 at $57.7 billion the previous month, the lowest monthly number since the jaws of the pandemic in June 2020. This was down from a high of 64 new unicorns at $139.1 billion in September 2021.

As of June 2014, there were over 1,200 active unicorns, according to Pitchbook.

Startups now need to leverage business levers, such as executing funding rounds less frequently and downsizing to maintain valuations.

Such moves have become necessary, Pitchbook said, “as they try to grow their financials to match their last cycle’s valuations in the face of much lower multiples.”

Payments startup Stripe, which according to Pitchbook was one of the world’s three biggest unicorns, is among the so-called unicorns that got a haircut on its valuation this summer.

In July, Stripe slashed the internal valuation of its shares by 28%, The Wall Street Journal reported.

Klarna also confirmed last month that its valuation had been reduced by 85% from $45.6 billion to just $6.7 billion after an $800 million funding round in which it raised capital from companies like Sequoia, Silver Lake and the Canada Pension Plan Investment Board.

Pitchbook described Swedish payment platform Klarna’s haircut as “revealing of the challenges faced by [Buy Now Pay Later] space”.

Sequoia partner Michael Moritz said the payments platform had taken a haircut “due to investors suddenly voting in the opposite way to the way they’ve been voting for the past few years.”

Shares of listed fintech companies have also plunged, with shares of buy-it-now and pay-later platforms Affirm Holdings and Zip Co Ltd (ASX:Z1P) falling 61% and 71% respectively this year.

Pitchbook said, “Macroeconomic conditions and high inflation caused the Fed to raise interest rates, which drove down stock prices, especially for companies whose value is based on growth.

“This massive reset in public market valuation multiples has scared off potential new issuers, as startups and investors need to consider current market conditions if IPO plans are on the table.”

IPOs in Europe hit their lowest level in ten years in the first half of 2022. The total amount raised in first IPOs in Europe in the second quarter was €2.1 billion, less one-tenth of the 23.1 billion euros raised during IPOs. in the equivalent part of 2021, according to PwC’s IPO Watch Europe Q2 2022.

“The London IPO market was largely closed in Q2 with just 3 IPOs raising £0.2bn compared to 20 IPOs raising £2.6bn in Q2 2021” , PwC said in a statement.

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