AI explosion could create the next generation of ‘zombie unicorns’, says investment bank
The term ‘zombie unicorn’ describes companies that were previously valued at $1bn but are now worth considerably less. The phenomenon has risen to prominence following a post-pandemic funding rebound that led to an unprecedented 787 businesses achieving unicorn status in 2021.
Many of these organisations were inflated in price due to favourable conditions but were never really worth the high valuations, with an estimated 517 unicorns globally failing to raise any money since the 2021 peak.
Over the past few years, there has been a significant slowdown in the rate unicorns are being minted – only 72 additional companies were valued at $1 billion in 2024. However, 44% of these new unicorns were AI startups, drawing concerns that excessive valuations could become concentrated in one sector.
According to Victor Basta, managing partner at Artis Partners, the sell-side M&A and growth financing specialists for technology companies, emerging AI companies may face the same dynamic if raising too early at too high a valuation before they achieve sustained growth.
Basta said: “Nearly four years have passed since the initial high valuations that spawned today’s abundance of ‘zombie unicorns’. These companies now need to exit in the next 1-2 years, but very often at much lower valuations, perhaps sub $500m in the majority of situations, and even a fraction of that for some.
“Yet at these sorts of valuations, many are successful companies that have achieved relevance in their space. Were it not for momentary high historic valuations, they would otherwise be viewed as attractive exit candidates.
“We can draw parallels between the events of 2021 that produced this wave of ‘zombie unicorns’ and the state of the market today. Three years ago, a massive surge in VC investment was the primary cause of the spike in $1n valuations, with this sudden influx driving up prices much faster than expected. While there was no notable increase in funding levels last year, one industry attracted the vast majority of the attention – AI. Therefore, what was a general trend in 2021 could be restricted to a specific sector in the years ahead.
“To prevent a repeat of previous events, it’s crucial that AI decision-makers recognise current market conditions are almost certain to bring about inflated valuations. Above the infrastructure layer, AI companies often do not need to raise large amounts of capital to scale. Recent history suggests doing that, at today’s inflated prices, risks storing up problems later, particularly for founders, who really need to keep realistic objectives in mind for what constitutes a profitable exit.
“The burden of a future filled with AI ‘zombie unicorns’ doesn’t rest solely on the shoulders of the businesses themselves. Despite the clear promise of AI, investors will hopefully become quickly more disciplined about funnelling money into companies who are unprofitable and lack clear use cases for their offerings.”
Basta concluded: “The current crop of ‘zombie unicorns’ are still capable of achieving exits at the profitability level they deserved from the outset, before their values were inflated. For the AI sector to avoid a similar fate, its growth stage incumbents should expand responsibly and avoid being drawn in by a burgeoning investment landscape.”