The Bell Isn’t Ringing.

Can “unicorn” mergers be an answer?

1/ As a consumer investor, it’s been frustrating to see so few notable consumer IPOs since Reddit. The reason for that goes beyond a narrowly opened IPO window -  the 736 company-strong U.S.-based unicorn herd is undergoing a slow-moving, potentially mass extinction event. There were only five tech IPOs in 1H 2024. Ringing the bell is harder to achieve than ever before. 

2/ Growth cures all ills and the expectation of massive growth (combined with low interest rates) is what led many of these companies to become unicorns in the first place. With a few notable exceptions (OpenAI, Brex, Anduril, SpaceX), growth has become elusive for many of these unicorns, so they’re at a difficult point in their trajectory that has left many companies in a holding pattern of sorts.

3/ As interest rates have gone up, corporate buyers of software and other products and services have inevitably become more discerning, with a higher required return on invested capital. You can see this problem play out in the public markets. The following chart from SVB shows median growth for top SAAS companies dropping from 36% in Q2 2022 to 20% in 2024.

4/ The same dynamics are on display in the private markets. The median U.S. unicorn has a growth rate less than 20%. Even more striking is that 30% of all U.S. unicorns have declining sales and are still unprofitable, according to SVB. 

5/ In their current state, there is no real exit opportunity for many of these companies. They don’t have the growth or scale to IPO and they do not have the profitability margins in the teens or higher than many private equity firms require to make an acquisition. Strategic acquisitions for unprofitable and negative growth companies are few and far between.

6/ Meanwhile, VC investors have to get liquidity back to their own Limited Partners and founders are tired, stressed and want to find a release valve so they can buy their first home or take a vacation. 

7/ We are seeing a high stakes, high-risk solution emerging for struggling unicorns that can’t rejuvenate growth or get to strong standalone profitability.

8/ Late last week, Ireland-based LetsGetChecked announced that it acquired TruePill for $525 million. These are both troubled businesses. According to reporting from Axios, “Truepill lost $15 million on $64 million in revenue for the first four months of this year.” This was after raising $372M in capital. LCG lost $32 million on $39 million in revenue over the first five months of 2024 after raising $284M in equity to date. 

9/ Having two poor chefs cooking together doesn’t usually lead to a better meal. But desperate times call for desperate measures.

10/  A merger can lead to a better mix of ingredients, where the industrial logic of the combined companies is strategically better than the standalone entities. Often, the combined companies change out the chef - founders are not usually the ones to lead a turnaround and a Board often brings in new management with restructuring experience. 

11/ In this particular case, LetsGetChecked provides home testing kits and TruePill provides digital pharmacy fulfillment. The thesis is that a vertically integrated solution will give the combined company better underlying unit economics. 

12/ Is there enough here to provide long term competitive advantage as a low-cost home testing and fulfillment option? Time will tell.

13/ But this highlights that even with years of runway, no-growth private unicorns will have to find a way to get liquidity - and often will turn to a merger that can lead to more scale and a greater chance of building a profitable business able to exit.

14/ These private mergers haven’t occurred often given the complexity of aligning and resetting the expectations of multiple stakeholders. 

15/ Equity holders often need to reduce or eliminate their liquidation preference to create a clean cap table for a combined companies. Debtors in each of the companies need to come together and align on who gets seniority in a liquidity event. Management is often heavily diluted and the Board needs to agree to give them an equity refresh. 

16/ Hope is often the strategy for a unicorn that has not met expectations. What a private merger requires is facing reality and companies and their investors relenting to a huge reset of expectations. Instead of shooting for an IPO, they have to lower their sights to paying off their debt provider and seeking a return on capital for their investors. 

17/ As efforts to rejuvenate growth continue to sputter at private unicorns, and cash balance starts to dwindle, expect to see more companies go down the path of LetsGetChecked and TruePill.

18/ On a more positive note, there are some great IPOs still in the pipeline. I’m excited to write about companies such as Canva, Skimms, Quince and Turo once they decide to brave the maelstrom that is the public markets.