There are now more than 1,000 private businesses with an investor valuation of $1 billion or above. In actuality, about 1.5 unicorns are created every day. However, neither was it always the case or, in our opinion, the aim. When the word “unicorn” was first used ten years ago, it gave the 14 private firms with a valuation of at least $1 billion a coveted status, and only four new unicorns were introduced yearly. At the time, it was a remarkable achievement and a real symbol of success that told clients, business partners, staff members, and the media that this firm should be taken seriously since it was likely to last.
Palantir, Pinterest, Uber, Square, and Airbnb were among the companies on the list that continue to have a significant effect on how we live and work. But even the initial unicorn list included certain businesses like Fab.com that did not endure as significantly over time. Today, the prevalence of unicorns has beyond all reasonable bounds. Private software valuation multiples have increased dramatically as a result of a 13-year bull market that has driven software IPO and M&A results to record highs and an availability of cash in the venture ecosystem.
The once-rare billion-dollar valuation became common and unimportant as investors found a means to underwrite results to 30x, 40x, and 50x+ multiples. The average entry multiple for a major cloud firm jumped from 9x annual recurring revenue (ARR) in 2016 to 34x in 2021, as we noted in Bessemer’s 2021 Cloud 100 Benchmarks study. This dynamic is what caused people to misjudge the size of unicorns. Unicorns may be deceptive; they frequently seem much larger than they actually are. A firm just needs $29 million in ARR to become a unicorn at a 34x ARR multiple.
A 34x ARR multiple is equivalent to a 45x current revenue multiple ($22 million in GAAP sales with midyear booking) for a $29 million ARR firm growing at 100%. A $1 billion value is increasingly commonplace, as opposed to before it was unique. ARR is a useful metric used by venture capitalists to assess the success of private cloud firms and to account for their high growth rates.
The ARR statistic, however, inflates revenues by annualizing contract prices and attributing annual client retention to the company. While reaching $29 million ARR is a tremendous accomplishment, the average LTM GAAP revenue across the BVP Nasdaq Emerging Cloud Index at the time of IPO was a startling $170 million. To put it another way, many of the top cloud unicorns still have the enormous task of increasing their income by a further 7x to reach the average IPO scale.