FANTASTIC BEASTS roam Silicon Valley. Locals are familiar with the unicorn, a startup valued at more than $1bn, the centaur (worth $100m) and the decacorn ($10bn). Lately another creature has been stalking the land: the “zombie” unicorn: a firm once worth $1bn-plus but now a mere shadow of its former self—a prospect to keep venture capitalists (VCs) awake at night.
Startups typically aim to spend five to ten years growing before listing on the stock market or finding a buyer. (Unsplash)
By May 2026, 332 of the 1,900 unicorns in a database maintained by Ilya Strebulaev of Stanford University had raised money at a valuation at or below their peak (see chart). Of those, 212 were valued at under $1bn. As many as 383 had disclosed no new funding in the previous three years; 41 of these had lost unicorn status. As Mr Strebulaev notes, data on startups are notoriously noisy. Some unicorns may have raised no money because they did not need it. But others may be struggling to justify mythical valuations. It seems that a fair proportion of unicorns have joined the undead.
When unicorn-spotting was at its height, plenty of those startups had scant revenues and sketchy business plans. But low interest rates encouraged investors in search of better returns into VC funds. In 2022 VCs raised $223bn, according to Pitchbook, a data provider. Interest rates have since risen and fundraising has fallen, to $66bn last year.
Some businesses seem simply to have been wildly overrated. Cameo, a video site where celebrities give personal greetings for a fee, was valued at $1bn in 2021 but is now reckoned to be worth $82m. The value of SonderMind, a platform for finding mental-health professionals, has plummeted from $1.1bn in 2021 to a mere $7m. More broadly, the fundraising downturn has punctured unicorns’ ability to raise more money at their old valuations.
Startups typically aim to spend five to ten years growing before listing on the stock market or finding a buyer. Zombies and their backers may find it hard to do either. VC agreements often allow investors to veto public offerings if they believe they would do better to wait. In the past the easiest option has often been to raise more from VCs. But now they are more interested in today’s hot firms than in taking a chance on ageing ones, says Peter Cohan, a tech investor. To convince them, startups often have to accept a cut to their valuation, among other unenviable terms.
Nearly half of the firms in Mr Strebulaev’s database valued at less than their peak raised money in 2021. From late next year their investors will start demanding results, reckons Pitchbook. It expects net cuts in valuations of between $500bn and $1trn as firms reprice, scramble to find a buyer or go bust. That is quite a cull: Pitchbook puts the total value of unicorns below the ten most valuable at around $5trn.
Falling valuations spell horror for VCs. More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan. That will make investors even more reluctant to fund VC firms outside the industry’s top ranks: already, just 5% of them produce 90% of its profits.
Spooked VCs are seeking answers. Some have shifted from conventional funds with predetermined lifespans to continuous ones that mix stakes in private companies with liquid holdings in public ones, allowing them to pay investors periodically. Others have turned to the secondary market for shares in private firms, giving investors a way to cash out. But both ideas work best for startups and VCs that are already doing well. They are less suited to rescuing the walking dead.
Some VCs hope that if this year’s giga-IPOs of star AI companies are a success, public markets will become more welcoming to tech’s lesser lights. It will surely take more than that to bring zombies back to life.
