The United States economy has at least 1,205 ‘unicorns’ – privately held startups valued at over $1billion – but that number may be in jeopardy as the possibility of a major recession looms.
Unicorns were previously considered rare entities, with as few as 266 such businesses in 2018.
Their numbers spiked when the competition was weeded out of crowded fields as businesses scaled back or went bust during the COVID pandemic, and the best ideas and businesses rose to the top of the funding pile.
But in 2022 the rate of new unicorns entering the market steadily plummeted, hitting a five-year low – just 19 unicorns were born in Q4, while at the same time a year before 139 were.
In recent years, the rate of new unicorns entering the market has remained strong.
In 2020 there was a steady increase across all four quarters, with 25 entering in Q1, then 27 in Q2, 38 in Q3, and 47 in Q4.
2021 saw a similar upward trend, in addition to a massive spike in the actual numbers being born quarterly. A whopping spike of 116 joined in Q1, then 148, 136, and 139 in Q2, Q3, and Q4 respectively.
But 2022 saw a staggeringly steep drop-off. The Q1 there were 126, but Q2 saw 87, then just 26 in Q3, and a mere 19 in Q4.
Consumer and retail unicorn startups
Auto and transportation unicorn startups
Recessions and times of economic hardship have traditionally been moments of opportunity for startups, as the competition for investors’ cash is slimmed down and only the best business ideas are able to rise to the top.
But the steady drop in new unicorns amidst 2022’s tumultuous financial landscapes suggests the future of new business investments may be in jeopardy should a recession come in 2023.
Experts at CBInsights suggest global events like the war in Ukraine, supply chain cost demands, and soaring US inflation may have caused unease among investors.
Should the financial situation continue to worsen, as many economists predict it will, the future of that funding for new businesses could remain in jeopardy.
Education technology unicorn startups
Data management and analytics unicorn startups
Two in three small and midsize US businesses eye the country slipping into a recession this coming year, say JPMorgan Chase researchers in the latest study to warn of inflation’s relentless toll on the economy.
The Wall Street bank’s 2023 annual Business Leaders Outlook released on Thursday found 65 percent of midsize and 61 percent of small firms eyed a recession, while most small company bosses expect high prices to stick around.
Ginger Chambless, a lead researcher with JPMorgan Chase, said the ‘challenging headwind’ of inflation, which hit a 40-year high of 9.1 percent in June, has ‘started to moderate and should cool over 2023.’
Still, she warned that high prices will impact spending for months to come and ‘businesses may still want to consider adjustments to strategies, pricing or product mixes to help weather the storm in the near term.’
JPMorgan Chase’s annual Business Leaders Outlook found that most bosses eyed a recession this coming year, but often felt they could still boost their sales and maybe even profits
Economists Lakshman Achuthan and Anirvan Banerji, cofounders of the Economic Cycle Research Institute — which determines recession dates for 22 global economies — said in a CNN op-ed the United States is on track to face another recession like the one in 2008.
And even though the GDP grew in the last quarter of 2022 and the economy added more jobs, Achuthan and Banerji say that will change soon, and that the Biden administration’s efforts to quash the downturn have come too late.
The Economic Cycle Research Institute has been predicting a recession since last spring, and Achuthan and Banerji say that prediction has not changed despite the Federal Reserve’s efforts to raise interest rates.
They explain: ‘By the time the Fed began hiking rates, the economy was already slowing, making recession more likely.’
Lakshman Achuthan and Anirvan Banerji, cofounders of the Economic Cycle Research Institute — which determines recession dates for 22 global economies — warn that a recession is coming in the near future
Achuthan and Banerji said the goods sector was particularly vulnerable because it is sensitive to rising interest rates, which increase the cost of borrowing for many families.
Last month, the Fed raised its benchmark rate by half a percentage point, still double the usual move but not as big as the last four hikes it has made, which were each three-quarter of a percentage point.
As a result, orders from US factories have declined, and — under the strain of rising mortgage rates — residential construction has plummeted.
At the same time, the economists write, the Purchasing Managers’ Index for Manufacturing, which measures the month-over-month change in manufacturing activity, fell by more than half over the past two months.
In its release last month, Timothy R. Fiore, chair of the Institute for Supply Management, said: ‘This is the second month of contraction, and as predicted, will likely be the norm for the PMI at least through the first quarter of 2023, with the PMI expected to be between 48 and 52 percent.’
A similar index for the services industry also fell below 50 last month, suggesting that services activity has started to decline as well.
The economists warn that the US is on a similar trajectory to 2008, the start of the Great Recession. Stock traders are seen here stressing about the economic downturn in October 2008
The economists write that even though the GDP hadn’t declined yet in the spring and summer of 2008, there were already signs of an impending recession
And while falling Growth Domestic Product and rising unemployment are sure signs of a recession, Achuthan and Banerji write that: ‘While GDP and jobs do move in step with the economy, by the time they are released, they only tell us where the economy had been in the recent past.’
‘Employment, in particular, can hold up longer than expected in a recessionary scenario.
‘That was true in the inflationary era around the 1970s. Most notably, unemployment didn’t peak until eight months after the start of the severe 1973-1975 recession.’
In December, nonfarm payrolls increased by 223,000 and the unemployment rate fell to 3.5%, a decline of 0.2%, both better than expected.
But Achuthan and Banerji said the reason many companies may not be laying off their employees yet is due to a so-called ‘money illusion,’ in which business owners tend to view revenue in real-dollar amounts rather than adjusting for inflation.
When adjusted for inflation, the economists write, revenues typically fall in a recession as customers make fewer or smaller purchases.
It also forces business owners to pay more for everything they buy, squeezing their profits and leading to layoffs.
That is what happened in 2008, Achuthan and Banerji said, ‘when many — including then-President George W. Bush — were not concerned about a recession because [the] GDP hadn’t declined yet, even though job losses had begun.
‘We pushed back against the prevailing complacency, writing for CNN at the time: “While GDP has yet to decline, we have already seen four straight months of payroll job losses. That suggests that the economy is on a recession track.
“And it implies that either one or both of the recent, slightly positive GDP estimates will be revised down to negative readings by next year.”
The economists concluded by writing: ‘Our recession forecasts haven’t wavered.
‘We should all be prepared.’
The gloomy forecast spells bad news for the Biden administration, which has tried to downplay the risks of a recession
Inflation in the US slowed down once again last month, rising at an annual rate of 6.5%. It marked the sixth straight month that the annual inflation rate has decreased
Three of today’s unicorn startups
The German-based company is building electronic helicopters for personal transportation and to serve as air taxis. Valued at $1.87billion
The Sarasota-based company sells water bottles with flavored filters. Valued at $1.07billion
Boston-based cybersecurity platform with technology that is adept at identifying and mitigating new forms of software viruses. Valued at $2.44billion
The gloomy forecast spells trouble for the Biden administration which has spent months trying to prove that the United States is not at risk of a recession.
It points to declining inflation and a rising GDP, which grew 3.2 percent year-over-year.
On Thursday, the Labor Department reported that prices for energy and many goods moderated or even declined in December, while prices for food, services, and housing continued to rise at an uncomfortable pace.
It marked the sixth straight month of declining overall annual inflation rates from June’s peak of 9.1 percent and a drop from the 7.1 percent rate seen in November.
December’s annual inflation rate of 6.5 percent marked the slowest annual pace for price increases since October 2021.
‘Even though inflation is high in economies around the world, it is coming down in America month after month, giving families some real breathing room. And the big reason is falling gas prices,’ Biden said in prepared remarks at the White House.
Meanwhile, the US Bureau of Economic Analysis reported in December that the current GDP dollar amount increased by 7.7 percent at an annual rate, or from $475.5billon to $25.72trillion.
It also said that current personal income amounts increased to $283.1billion in the third quarter of 2023, primarily due to increases in compensation, personal interest income, and nonfarm proprietors’ income, while disposable personal income increased $242.4billion or 5.4 percent.
But, the BEA reported, the price index for gross domestic purchases increased 4.8 percent and the profits from current production decreased by $1.3billion.
At the same time, profits at domestic financial corporations decreased by $1.8billion.