Summary of Key Points
Nearly half of the 857 unicorn companies in the United States have not received any new funding in the past three years. Over 220 companies that were once valued at $1 billion or more have seen their valuations plummet due to the impact of AI and the bursting of related bubbles. Generative AI has rewritten the rules of venture capital investment: the traditional approach of valuing companies based on the number of engineers (a so-called “human-powered strategy”) is no longer effective. Capital is now flowing towards companies that are inherently built for AI, while older firms, with higher costs and outdated technologies, struggle to attract funding or meet the requirements for going public, and many are forced to be acquired at a discounted price. This industry reshuffle triggered by AI is just beginning.
Detailed Analysis
#### 1. Venture Capital no Longer Values Companies Based on the Number of Engineers
Five years ago, the venture capital community favored a strategy of “accumulating personnel” to inflate company valuations. For example, if a company had 100 engineers, with an estimated value of $2 million per engineer, the total valuation would be at least $200 million. Back then, funds were plentiful, and demand surged due to the pandemic, allowing companies to obtain high valuations even without generating profits. However, with the emergence of ChatGPT, 50 people using AI tools can perform the work that used to require 500 people. Venture capital now focuses on the efficiency of AI systems, not just the number of employees. Capital is heading towards companies like OpenAI and Anthropic, which have already attracted $250 billion in investment. Stock prices of established software companies such as Salesforce have declined due to the threat posed by AI, and the private equity market has quietly liquidated many older firms.
#### 2. Nearly Half of Unicorns Have Run Out of Funding, with Valuations Dropping Dramatically
According to PitchBook data, more than 400 out of the 857 unicorns have not raised any funds in three years, effectively rendering their original valuations invalid. Over 220 unicorns have seen significant reductions in their valuations. For instance, the drone company Skydio’s valuation dropped from $2.5 billion to $500 million; although it later raised funding and its valuation rebounded, most companies have not been so lucky. Among these are well-known brands such as Glossier (a beauty company), Savage X Fenty (Rihanna’s underwear line), and The Farmer’s Dog (a pet food company), which were once leaders in the direct-to-consumer (DTC) trend. These companies relied on low interest rates and the potential for acquisition by larger corporations to maintain their high valuations, but with rising interest rates and the disruption caused by AI, these factors no longer support their valuations.
#### 3. Enterprise-Level Software Companies Are the Most Affected
The majority of the “unicorn companies in distress” are those providing enterprise-level software (SaaS solutions), totaling 75, twice the number of fintech unicorns. Why? SaaS companies generate revenue by charging per user, such as with calendar management apps like Calendly. However, AI-powered tools can automate many of these tasks, posing a direct threat to their business models. Experts predict that within the next decade, all SaaS companies that rely on traditional business processes will either be disrupted or disappear. Older companies face significant challenges in adapting, as they often have large and inefficient teams and outdated software. Investors prefer to invest in new AI startups rather than supporting them.
#### 4. Lack of Funding and Failure to Go Public Forces Discounted Acquisitions
Without access to funding and unable to meet the requirements for public listing, these struggling unicorns have no other choice but to sell themselves at a discount. For example, the financial app Stash was acquired by Grab for less than the amount invested ($660 million vs. $425 million), and the fintech company Step was purchased by a influencer for far less than its initial $500 million valuation. At the peak in 2021, software company valuations were often 50 times their expected future revenue; now, they have dropped to just one-sixth of that level. Unless these companies can completely transform into AI-based businesses, they are likely to be acquired at a fraction of their former valuations.
#### 5. The AI-Driven Industry Reshuffle Is Just Beginning
The impact of AI is still expanding: investments in new AI projects now yield higher returns than those in older ventures. AI has lowered the barriers to entry for startups, allowing smaller teams to develop innovative products. Experts predict that the entire financing ecosystem, from venture capital to public companies, will be restructured by AI. Traditional software companies that do not switch to a model based on performance (e.g., charging based on the value they create for their clients) or integrate AI technologies may not survive this transformation. This storm is far from over, and many more companies are likely to be affected.
In Simple Terms
AI has acted like a “scissors,” cutting away the inflated valuations of older unicorns while opening doors for new AI startups. Companies must either adapt to the changes brought by AI or risk being left behind by the times.