Generative AI Reshapes Startup Valuations, Stranding Pre-ChatGPT Unicorns
Five years ago, venture capitalists were pouring money into American startups selling everything from lingerie subscriptions to scheduling software, anointing them with billion-dollar valuations before most turned a profit. That frothy era, fueled by cheap money and pandemic-boosted demand, ended abruptly after the arrival of ChatGPT in 2022, forcing a fundamental revaluation of private companies.
The ChatGPT Reckoning
Even after the Federal Reserve began raising interest rates in 2022, many founders believed they could grow into their inflated valuations, investors told CNBC. Then ChatGPT arrived. "The ChatGPT moment was when people said, 'Holy smokes, the next generation of entrepreneurs, their coding language is spoken English,'" said Samir Kaul, a partner at venture firm Khosla Ventures, an early backer of OpenAI. "Now you're seeing 50 engineers do what it would've taken 500 engineers to do five years ago," Kaul said. "We had to completely reshuffle how we valued these companies."
While shares of public software companies like Salesforce, ServiceNow and Workday got hammered this year over the threat from artificial intelligence, a quieter reckoning unfolded in private markets. The artificial intelligence boom funneled more than $250 billion into OpenAI and Anthropic ahead of their expected mega-initial public offerings this year, leaving hundreds of startups built before ChatGPT's arrival stranded — cut off from venture funding due to inflated valuations and outdated technology, yet not profitable enough for public markets.
Fallen Unicorns: 857 Startups, Nearly Half Stale
There are 857 U.S. startups valued at $1 billion or more, the threshold for being deemed a "unicorn" company, according to PitchBook data. But nearly half of that group hasn't raised fresh funding in the last three years, making those valuations stale, the private markets data firm reported. Startups that last raised in 2021 are now worth 68% less on average, while those that last raised in 2022 saw a 52% decline, according to PitchBook's own valuation estimates.
As a result, more than 220 companies that had reached billion-dollar valuations in the venture boom are now fallen unicorns, according to PitchBook, which provided an exclusive list to CNBC. The estimates are based on factors including head count growth and comparisons with public companies.
Stranded Pre-AI Startups
"A lot of those companies are pre-AI, not just in their cost structure, but also in their products," Mercury CEO Immad Akhund told CNBC. His company, which raised $200 million in funding last month, provides banking services to a third of early-stage U.S. venture-backed firms. "They're definitely in a difficult spot," he said. "All the attention's on AI, so if you're not an AI-first company, you need really strong numbers to raise."
The list of fallen unicorns includes well-known brands like Glossier, The Farmer's Dog, Rothy's, Brooklinen and Savage X Fenty, the lingerie company founded by Rihanna.
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