A plateau in unicorn growth

Unicorns in Europe have multiplied more than four-fold in the past five years, but recent trends suggest a plateau. Unicorn formation rates peaked in 2021, but since then, growth has slowed considerably, with valuations largely stagnant at 2021 and 2022 levels. Looking to today, the European unicorn market remains concentrated, with the UK and sectors like Fintech and SaaS leading the market. Yet, over half of these companies have valuations from peak periods, creating a potential vulnerability as markets adjust to more conservative valuation norms following the COVID pandemic which caused a boom in valuations.

Scenario Analysis: Bear, Base, and Bull Cases

PitchBook’s European Unicorn report modelled three possible futures for Europe’s unicorn market based on adjustments to past valuations:

• Bear Case: this worst-case scenario anticipates that 80% of unicorns with 2021 and 2022 valuations will face down rounds, leading to a sharp 21.8% drop in market value, erasing nearly €100 billion. This scenario assumes a lack of market recovery for these valuations
• Base Case: in a moderate view, 50% of unicorns would undergo a valuation cut, aligning valuations with 2024 market trends. This would result in a 5.9% decline, amounting to €26.4 billion in lost value
• Bull Case: when it comes to the most optimistic outlook, only 20.9% of unicorns would see a valuation decline, with a potential market recovery in 2024. This model predicts minimal loss, with the market staying relatively flat

These scenarios emphasise that market corrections in Europe’s unicorn segment are likely, though the exact degree of change that will happen will depend on the overall economic climate and the venture market’s ability to rebound.

The key challenges

There are several factors that could cushion or exacerbate valuation declines:

Self-sufficiency: many unicorns raised significant capital during peak years, potentially delaying their need for further financing. Companies that have achieved organic cash flows may avoid down rounds

Debt financing: Around 15% of active unicorns, such as SumUp, have turned to debt financing rather than equity. This strategy allows those companies to raise capital without affecting their valuations

IPO Market: the IPO window remains tight, but if it opens, some unicorns might exit the private market, reducing aggregate unicorn value yet increasing liquidity in the venture ecosystem

Which sectors are most at risk?

Valuation trends are not the same across all sectors. B2B companies have seen the sharpest valuation cuts since 2021, with median declines reaching 40%. Conversely, financial services unicorns have shown resilience, with only a 2% decline. Understanding these differences could guide founders and investors in assessing risk and adjusting strategies accordingly.

Implications for founders, investors, and LPs

The current and projected valuation corrections hold different implications for stakeholders:

Founders: valuation cuts could impact founders’ financing prospects, potentially diluting equity stakes in future rounds. Sector-based data can help founders anticipate valuation adjustments and plan accordingly

Investors: for venture capitalists and growth-equity investors, valuation declines bring potential risks and highlight the need for caution going forward. The base-to-bull case model provides a framework to anticipate the likelihood and extent of future valuation corrections

Limited Partners (LPs): declines in unicorn valuations may affect returns for LPs, as exit values could drop. Reduced liquidity and lower returns will limit reinvestment capacity, which could, in turn, impact the long-term growth of Europe’s venture ecosystem

A pivotal time for Europe’s unicorns

While the European unicorn market remains sizeable, current valuations may not reflect true market conditions. There are indications that a conservative recalibration is on the horizon, potentially trimming down the unicorn landscape by 6% or more.

As the market navigates this, the European unicorn ecosystem will need to adapt, with a focus on sustainable growth and resilience. By monitoring valuation trends, stakeholders can position themselves strategically, ensuring Europe’s venture ecosystem remains robust and adaptable to future economic shifts.

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