Two trends that hint at a bleak future for unicorns and VCs

As we await the inevitable thinning of the unicorn herd, some new numbers released this week show just how much trouble companies with runaway valuations could be facing.

In its Q3 2015 report on tech exits (both IPOs and M&A), CB Insights highlights several worrisome trends that could also have big implications for venture capitalists.

First, the report notes that for the three months ending Sept. 30, there were no exits of companies worth $1 billion, and only five exits that topped $500 million.

At the same time, the firm counted 23 companies that attained unicorn status during Q2 and Q3 2015.

Of course, this month, we saw Square go public with a valuation above $3 billion. And the Match Group went public above $3 billion, though that company’s investment and acquisition history doesn’t make it a neat example of anything.

Still, it seems the number of unicorns is growing at a far faster rate even as their ability to exit diminishes. Yes, taking all this capital lets companies stay private and independent longer. But at some point, investors will want a return.

And if unicorns can’t IPO or get acquired…then it seems things could get, well, ugly.

But…

Even as the world focuses on unicorns and sky-high valuations, most of the action in terms of exits is really at the low end. And this is where the second set of trends is going to potentially cause some headaches.

CB Insights notes that of companies it was tracking, 54 percent of the exits were for less than $50 million. So, companies are getting snapped up fast. For VCs that manage to get in, the returns will be good, but not home runs.

But…

More and more of these companies that are exiting aren’t even taking VC money, or any other institutional investment. CB Insights reports that 82 percent of tech companies did not raise institutional capital of any kind before they exited in Q3, up from 73 percent for all of 2014.

So, exit valuations are diminishing, and VCs aren’t even getting involved in the bulk of these deals.

No wonder everyone is trying to pile into the late rounds of unicorn companies that have already demonstrated some success.

While that might work as a short-term strategy, it seems like sooner, rather than later, there’s going to be a serious reckoning for VCs and unicorns alike, as the nature of startup investing continues to radically reboot itself.