The once-thriving billion-dollar startup bubble is rapidly losing air, leaving over $1 trillion in trapped value within companies that now face dwindling opportunities.
It may seem like a distant memory, but before artificial intelligence took over as Silicon Valley’s main obsession, the startup ecosystem was booming with innovations across various sectors. By the peak of the Covid-era tech surge in 2021, more than 1,000 venture-backed startups had secured valuations exceeding $1 billion, joining the unicorn club. Among them were Impossible Foods, known for its plant-based meat, Thumbtack, a platform for home services, and MasterClass, a popular online education company. However, this momentum quickly faded due to rising interest rates, a slowdown in the IPO market, and a growing perception that non-AI startups were falling out of favor.
A Long-Awaited Reckoning Becomes Reality
What had long been anticipated is now hitting home. In 2021 alone, 354 startups reached unicorn status, but according to Stanford professor Ilya Strebulaev, only six have successfully gone public since then. Another four took the SPAC route, and 10 managed to secure acquisitions—though several were valued at under $1 billion when sold. Some, like Bowery Farming (indoor agriculture) and Forward Health (an AI-driven healthcare company), have shut down entirely. Even once-promising businesses like Convoy, a freight logistics company once worth $3.8 billion, collapsed in 2023, with Flexport acquiring its remaining assets for a fraction of their previous value.
Many startups now feel as though the floor has disappeared beneath them, says Sam Angus, a partner at Fenwick & West. The reality of fundraising has fundamentally changed, making it much more difficult to secure new capital.
The Rise of "Zombie Unicorns"
Welcome to the era of zombie unicorns—startups that once commanded billion-dollar valuations but are now stuck in limbo. CB Insights reports that 1,200 venture-backed unicorns have yet to go public or be acquired, with many forced into desperate financial maneuvers. Late-stage startups face particularly harsh conditions, as they typically require large amounts of funding to sustain operations. However, investors who once eagerly wrote checks for billion-dollar valuations have become far more selective.
For many, down rounds, fire-sale acquisitions, or steep valuation cuts are the only options left to avoid complete failure—risking a fate where they become unicorpses rather than unicorns.
A Harsh Funding Reality
The fundraising downturn began in 2022, largely triggered by the Federal Reserve's series of interest rate hikes, which ended a decade of easy access to capital. As borrowing costs surged, companies across industries cut expenses and laid off employees, with tech-sector layoffs peaking in early 2023, according to Statista.
Some startups that were previously focused on rapid expansion at any cost have since pivoted to prioritizing short-term profitability in an effort to reduce reliance on venture capital funding.
The Aftermath of the Boom
However, many startups were built on high-growth models that disregarded short-term profitability, assuming they could continue raising funds at increasingly higher valuations. That assumption has backfired in the current market.
According to Carta Inc., a fintech firm that tracks startup funding, fewer than 30% of 2021’s unicorns have raised additional financing in the past three years. Of those that have, nearly half have done so at significantly lower valuations—a sign of distress for many companies.
For instance, Cameo, a platform for celebrity video greetings, once boasted a $1 billion valuation but raised new funds last year at a staggering 90% discount, according to a source familiar with the matter. Similarly, fintech company Ramp, which was valued at $8 billion in 2021, has since raised two major funding rounds at lower valuations.
In some cases, down rounds have helped struggling startups regain stability. ServiceTitan, a contractor software company, initially raised money under unfavorable terms in 2022 but later exceeded those valuations when it successfully went public in 2024. It now boasts a market cap of $9.4 billion, aligning with its peak private valuation of $9.5 billion in 2021.
The Vicious Cycle of Down Rounds
However, restructuring efforts like job cuts and valuation declines can create a downward spiral. Startups rely on momentum to attract investors, and when they start sacrificing growth for financial discipline, it becomes much harder to maintain confidence in their future prospects.
For employees, one of the biggest incentives to work at a startup is the potential for valuable equity stakes. But as valuations decline, many workers begin looking for opportunities elsewhere, causing further instability within these companies.
Creative Measures to Avoid Valuation Declines
Startups in relatively stable financial positions are resorting to various tactics to avoid openly admitting valuation declines. Some are classifying new fundraising rounds as extensions of previous ones, allowing them to maintain the illusion of a flat valuation rather than acknowledging a decrease. In this tough market, even flat rounds are now considered a success.
Other companies are being forced into far less favorable deals. Some funding agreements now include structural changes in ownership, such as pay-to-play provisions, which require previous investors to participate in new rounds or risk losing their equity stake.
These deals are often deeply unpopular among existing shareholders. In 2023, Ryan Breslow, the co-founder of payments startup Bolt, attempted to raise funds through a pay-to-play round, only to face strong pushback from major investors—eventually derailing the effort.
The Harsh Reality for Struggling Startups
For some, taking on onerous financing terms is simply delaying the inevitable. The digital pharmacy Truepill, for example, was acquired after a pay-to-play round—but at a valuation nearly two-thirds lower than its 2021 peak, according to PitchBook Data.
To many investors, such high-risk deals are a clear red flag that a company is on its last legs. Jeff Clavier, founder of Uncork Capital, puts it bluntly:
"If a company has to resort to these kinds of funding deals, it's probably doomed anyway."
Who’s Buying? The Role of Private Equity
For the startups that still hold value, deep-pocketed firms like private equity investors may step in to acquire them. However, expectations should be tempered—businesses simply aren't going to command the kind of valuations they once did, says Chelsea Stoner, general partner at Battery Ventures.
What’s Next? A Long Shot for Recovery
For the few optimists still holding out hope, there’s speculation that a fresh wave of investor enthusiasm could turn things around. Some believe a potential shift in U.S. regulatory policies—such as a Trump administration without FTC Chair Lina Khan—could reignite M&A activity and boost IPO markets.
However, Greg Martin, founder and managing director at Archer Venture Capital, remains skeptical.
"Unless we see another bubble fueled by zero-interest rates—like the one we saw during the pandemic—many of these zombie unicorns are headed straight for the graveyard," he warns.