The 2022 Founders Factories report by DealRoom and Accel shines a spotlight on the startup clusters that produced most unicorns across Europe and Israel, and then tracks the alumni of those unicorns to test where the talent goes to found their next companies. On a high level, the report found that “of the more than 300 VC-backed unicorns in the region, 203 have fuelled more than 1,000 (1,018) new tech-enabled startups, with former employees becoming founders“.
In terms of hubs, UK and Israel have produced the highest numbers of unicorns outside of US and China.
In Israel, Wix leads the list of second generation startups, followed by Playtika and Payoneer. Other Israeli unicorns, including Waze and Mobileye, have also spun off numerous startups.
London and Tel Aviv are home to the most founder nurturing unicorn startups. In London, 27 unicorns saw 168 new startups founded by former employees. In Tel Aviv 27 unicorns produced 108 startups by alumni. Most Israeli unicorn alumni who turn founders, choose to stay in Tel Aviv, and so do most London unicorn alumni founders.
Companies have raised record amounts of venture capital money in 2020 and 2021. In 2021, a new unicorn was created every 3 days.
According to Pitchbook’s Q3 2022 European VC Valuations Report, Europe minted 40 unicorns in the first 3 quarters of 2022. It matched the rate of unicorn creation in Q1 and Q2, before dipping in Q3, which only saw 4 new unicorns created. Even, so, the figure of new unicorns in 2022 is bigger than 2018, 2018 and 2020 combined.
With interest rates at zero for nearly a decade, money was cheap and chasing growth opportunities. Much of that capital is still sitting on companies balance sheets, but the pace of venture capital deployment was down 50% in Q3 2022 in the US and 44% down in Europe.
It’s enough to take a look at the global unicorn club of 1,191 startups valued at $1 billion or above to understand that challenging times are ahead for many of them. Atomico’s founder Nicklas Zennstrom recently called the end of the high valuations era and urged founders and VCs to remove the stigma from down rounds.
As mentioned in the Battery Ventures “State of the Opencloud report” 2022, the bar is high for these private unicorns to transition into successful IPOs. To justify the valuation, some will require 10x revenue ramp and more efficient margins. Growth at all costs is no longer an option.
Talking to friends who are growth stage investors, in 2021 startups took money at ever growing valuations because it was available and because they didn’t want to stay behind their competitors. Now, many of these companies are laying off talent to cut costs in the hopes to catch up to their valuation or at least defer fundraising until the market improves for fundraising or IPOs.
As an early stage investor, I’m optimistic about the talent that is being ‘released’ from these unicorns with entrepreneurial spirit and a wish to leave their own mark as founders in ‘2nd generation’ startups.