Era of mega-funded, money-losing unicorn start-ups is coming to an end

Key Points
  • Of the 80 companies that went public last year, 28 of them were worth $1 billion or more at the time of their IPO.
  • But it was the start-ups that had raised far less venture capital that performed better as IPOs.
  • "If you have raised more than $250mm & are NOT public, the presumption is you are losing WAY too much money, and you probably have sh***y unit economics," veteran venture capitalist Bill Gurley recently tweeted.
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The era of the mega-funded private company could be ending

As we begin accepting nominations for CNBC's eighth annual Disruptor 50 list, we're looking at how this year's batch of companies will reflect the latest tech trends.

Last year was a big one for companies valued at $1 billion or more — the so-called "unicorns." There were 36 on the 2019 Disruptor 50 list, and of the 80 companies that went public last year, 28 of them were worth $1 billion or more at the time of their IPO.

But the performance of last year's biggest debuts, such as Uber and Lyft, has shown that raising billions of dollars pre-IPO has not translated to public market success. That means, as investors and executives scrutinize those results, the era of mega-funded private companies waiting to go public could be coming to an end.

Benchmark Capital's Bill Gurley, a longtime venture investor, recently tweeted his unicorn doomsday prediction.

Take Uber, the biggest IPO of last year: It raised $14 billion before it went public and then $8 billion in its IPO. Since it went public in May, the stock is down 17%. Lyft, the second-biggest IPO last year, raised $5 billion before its IPO and another $2.3 billion in its public offering. Its stock is down 34% since it started trading at the end of March.In contrast, one of the lowest-valued companies on last year's Disruptor 50 list, Progyny, with a $123 million market cap, pre-IPO, raised just $93 million before it went public. Since it started trading, its stock has doubled.

Traders work on the floor at the New York Stock Exchange.
Brendan McDermid | Reuters

In fact, the companies that went public last year that are trading above their IPO price raised far less money, on average, than those that are trading lower. Companies trading below their IPO price raised an average of $774 million in venture capital funding, according to PitchBook. Those trading above their IPO price raised less than a third as much, $209 million.

Another trend to watch: the rise of new sectors, as more venture capital firms back start-ups in sectors outside software and consumer technology. In fact, last year the number of VC investments in software companies declined 7% from 2018. Software is still drawing more investment dollars than any other sector, but its share of deals is declining.

In contrast, investments in health-care services and systems increased by 16%, according to PitchBook. That's the fastest-growing sector in terms of the number of deals, though it's still just 7% of the total. And investments in companies offering commercial services grew 11%. This category includes a range of start-ups offering all variety of tools for businesses, from accounting and educational services, to real estate, including WeWork. And WeWork's fundraising last year, despite its IPO catastrophe, was still the biggest driver of this sector's money flows.

In addition to a diversity of types of companies drawing funding, we're also seeing Silicon Valley lose its stronghold on Venture Capital investing. The Bay Area's percentage of VC investment sank to 37% its lowest level since 2013, while the percentage of deal value that went to West Coast-based companies dropped to 50% of the country's total, down from 62% in 2018.

Eligible companies can submit their nominations for the 2020 CNBC Disruptor 50 by clicking here. The deadline to submit nominations is Friday, February 14.