Unicorns winning smaller valuation increases from investors

Unicorn companies have been winning smaller valuation markups from their investors, but few have suffered down rounds, according to a study from Fenwick & West.

The report looked at 31 unicorn financings in the United States from 2016 and compared them to 97 in 2014 and 2015. Overall, it suggests venture capitalists still believe in their companies. But investors appear increasingly gun-shy at the rich share markups seen in 2014 and 2015.

What also stands out is that this caution continues to defy gravity when considering unicorn exit results. Two in five unicorns that went public or were acquired in 2016 earned valuations lower than their latest private financings, Fenwick & West discovered.

The study found that since mid-2015, the percentage of unicorn companies winning up rounds has steadily declined to 60 percent in the fourth quarter of 2016. For all of 2016, it was 75 percent. This compares with 100 percent in 2014 and 96 percent in 2015.

In lieu of up rounds, deals are increasingly being done at flat valuations. In the fourth quarter, 40 percent of deals were done with pricing unchanged, and for all of 2016, 21 percent were. This compares with 2 percent in 2015.

Only 4 percent of unicorn financings last year were down rounds, not a great departure from the 2 percent in 2015.

Valuation increases, meanwhile, have moderated. In the fourth quarter, the average hike in per-share pricing was 27 percent. That’s down from a peak of 253 percent in the fourth quarter of 2015. For all of 2015, the average increase in deal pricing was 83 percent compared with 162 percent in 2015.

Perhaps as a result, the use of protective terms in unicorn terms sheets, such as liquidation preferences, blocking rights and ratchets, has not changed significantly from 2015 to 2016, the study found.

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