Coined by venture capitalist Aileen Lee back in 2013, the term unicorn was chosen to illustrate the rarity of privately held startup firms valued at more than US$1 billion. For many early-stage entrepreneurs, gaining unicorn status was the pinnacle of success.

However, while just 39 companies had reached unicorn status when the term was created, there were more than 1,200 operating as of October 2022, according to CB Insights.

Once hard to find, unicorns are now commonplace across the global startup ecosystem. Thanks to a range of factors, including easy access to capital and the emergence of innovative new technologies, some unicorns have ascended to become so-called decacorns. A step above unicorns, decacorns are private startups with a valuation of more than US$10 billion, with these businesses growing rapidly in number.

Unprecedented Growth

Spacecraft manufacturer SpaceX, payment processor Stripe and buy-now-pay-later firm Klarna are a few of the leading businesses that have joined the decacorn club in recent years. A total of 48 firms can claim the decacorn status as of April 2022, according to Failory, with the United States and Europe being responsible for creating the largest number of decacorns.

And unicorns are becoming decacorns faster than ever before. Alan Poensgen, Partner at global early-stage venture capital firm Antler, believes this has been driven by a confluence of three main factors that have been steadily increasing over the past decade, namely talent, capital and the rate of technological change.

“The amount of capital flowing into backing emerging technology companies has grown massively over the past decades,” he adds. “There is a flywheel of entrepreneurial talent that we see in all ecosystems, where early employees of successful technology companies go out to start their own companies that then, in turn, educate the next generation of talent.”

Massive advances in AI and quantum computing are a few factors that have created historically unprecedented rates of disruption and opportunity that forward-thinking startups have capitalized on to achieve high rates of growth.

By utilizing cutting-edge technologies to offer an unparalleled product or solution for customers, startups have been able to disrupt the marketplace, fill a gap and rise to decacorn status.

Mathias Ockenfels, General Partner, Marketplaces & Consumer, at venture capital fund Speedinvest, agrees that the availability of ‘cheap money’ boosted the numbers of decacorns, with the COVID-19 pandemic also playing a major role in enabling startups to gain access to funding.

From Turkey-based ecommerce platform Trendyol to Indian edtech firm BYJU’S and Indian food deliver service Swiggy, a number of tech startups have capitalized on pandemic-related trends, including rising ecommerce sales and distance learning, to grow into decacorns.

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“With ecommerce and digitization booming while supply chains were disrupted – technology, i.e., software, seemed to be the only real solution to these challenges. Even in a high-inflation environment, efficiency gains are the only way out and technology is key to that,” Ockenfels says.

Rather than being valued based on previous financial performance, decacorns are mainly valued on the potential that these startups will experience rapid growth in the future. For investors, selecting which firms are likely to be successful is more of an art than a science, with the majority of early-stage startups failing to meet the lofty heights of a US$10 billion-plus valuation.

Challenging Environment

Data from Crunchbase illustrates the funding challenges faced by unicorns seeking to gain funding on their growth journey. Venture funding for the third quarter of 2022 reached US$81 billion, a fall of US$90 billion, or 53 percent, year on year. Perhaps most concerningly for unicorns, late-stage funding saw a dramatic 63 percent year-on-year collapse in investment.

“To some extent, the lower funding rounds we’re seeing in 2022 is a sign of market correction,” Poensgen adds. “There is still plenty of capital available, but unicorns and decacorns will need to demonstrate more revenues, real profitability potential and real growth to justify multibillion-dollar valuations.”

While unicorns will continue to transition into decacorns, Ockenfels expects the bar to be much higher going forward. “As public market comparables such as revenue have significantly decreased, companies need to show much higher absolute revenues to get the same valuation they used to get previously,” he explains.

Even in the most volatile economic times, startups with strong fundamentals can take the opportunity to outcompete competition and consolidate markets, says Ockenfels. But for other companies that don’t manage to take the lead in their industry early on, it’s likely to be far more difficult to fundraise and scale their businesses.

“In the short-term, the market for late-stage and pre-initial public offering (IPO) financings has pretty much collapsed and come to a halt. Investors are figuring out what the ‘new normal’ is and are waiting to deploy funds,” he adds.

Startups in the technology space are uniquely at risk from the decline in funding, as they often require extremely large amounts of money to build their product or solution, as well as hire skilled staff who are in high demand. In practice, these types of startups will need to raise funding from several investors on their journey to become a decacorn, which will be increasingly difficult going forward.

For Matthew Rhodes-Kropf, Senior Lecturer at the MIT Sloan School of Management, the immense demand for technology across the world will still drive the growth of unicorns and decacorns. “Although low interest rates have ended, the unbelievable pace of technological innovation continues. Some of those innovations will create the great companies of tomorrow,” he says.

Since Facebook, now Meta, became the first decacorn in 2017, dozens upon dozens of these mammoth firms have entered this exclusive club, with around 30 unicorns transitioning to decacorns in 2021 alone. The next few years may be tough for unicorns that have aggressive growth ambitions, with funding becoming increasingly scarce and hard to obtain. But in the fast-moving investment world, nothing lasts forever.

“Currently, we are in a tougher environment to get funding – so yes, today it is more difficult for unicorns to get funded,” Rhodes-Kropf concludes, “but just like all waves and troughs of investing, this too will end.”