The Unicorn Trap: How A US$1 Billion Valuation Just Became A Startup’s Worst Nightmare

This article written by Amaya Nichole was originally published on Inc.com.

In today’s venture market, a billion-dollar valuation has become a massive headache for many founders.

At the height of the startup boom, venture capitalists were issuing grand valuations to American companies that had only just begun to prove themselves. Then, the artificial intelligence (AI) boom arrived, which directed more than US$250 billion into OpenAI and Anthropic.

This shift left hundreds of pre-AI startups behind, many of which are saddled with inflated valuations and aging technology. Yet, at the same time, they’re still too unprofitable for the public markets. As a result, many of them have found themselves effectively frozen out of the funding they need to survive.

“The ChatGPT moment was when people said, ‘Holy smokes, the next generation of entrepreneurs, their coding language is spoken English,’” Samir Kaul, an early backer of OpenAI and a partner at the venture firm Khosla Ventures, told CNBC.

“Now you’re seeing 50 engineers do what it would’ve taken 500 engineers to do five years ago,” Kaul added. “We had to completely reshuffle how we valued these companies.”

The result is a widening gap, with post-ChatGPT startups pulling further ahead of their older competitors with every passing quarter.

According to PitchBook data shared with CNBC, 857 U.S. startups currently hold unicorn status, but nearly half of them haven’t raised fresh funding in three or more years, leaving their valuations increasingly stale. More than 220 companies that reached billion-dollar valuations during the venture boom have since fallen from that threshold. Startups that last raised in 2021 are now worth 68 percent less on average. Those that last raised in 2022 are now down 52 percent.

Among those are well-known companies like Rothy’s, Brooklinen, Savage X Fenty, Glossier, the Farmer’s Dog, and AG1.

The signs of distress have become hard to ignore. “They’re definitely in a difficult spot,” Immad Akhund, the CEO of Mercury, a banking fintech, told CNBC. “All the attention’s on AI, so if you’re not an AI-first company, you need really strong numbers to raise.”

AG1, the nutritional powder company, offers a window into just how dire things have gotten. Reuters recently reported that AG1 is exploring options, including a partial or full sale at a $2 billion valuation that includes the company’s debt.

Generative AI has redrawn the landscape entirely, pulling capital toward AI-native firms and leaving many older startups unable to defend the numbers they once commanded.

For the hundreds of startups still caught in the middle, the window to find a way out is narrowing. AG1’s predicament suggests that even the most recognizable names aren’t immune to the pain.