The decline in the number of new additions is more reflective of the market's trend towards de-bubble after the wave of capital speculation in previous years, which is not a bad thing for the high-quality development of China's unicorn ecosystem. We should pay more attention to the long-term positive development capabilities of unicorns, the value of technological and business model innovation, and their role in promoting the real economy and their social and commercial value.

The concept of "unicorn" was proposed by American venture capitalist Aileen Lee in 2013 to describe technology startups valued at over $1 billion that have not yet gone public. At that time, companies with such high valuations were indeed rare (only 39), such as Alibaba, Twitter, Uber, Airbnb, etc. Since then, the entrepreneurial boom has intensified, and an exceptionally loose monetary environment has helped venture capital firms to raise cheap funds at an unprecedented speed, pouring into startups.

The development and popularization of the internet and smartphones have provided the digital infrastructure for the prosperous development of e-commerce and social media companies supported by venture capital. With huge network effects and low marginal costs, the number and valuation of global unicorns, as well as the scale of the global venture capital market, have been rising continuously.

Since unicorns are a private sector concept, there is no very clear definition or unified standard for unicorns among various institutions at home and abroad. At the same time, compared to the secondary market, the transparency of information in the primary market is lower, leading to differences in the selection and inclusion criteria for unicorns on various mainstream venture capital data platforms at home and abroad, and the data obtained is also different, but the overall trend of data changes is similar.

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Trend of changes in the number of unicorn enterprises

The "2024 Global Unicorn List" released by the Hurun Research Institute shows that by the end of 2023, China had 340 unicorn enterprises, still ranking second in the world, but compared with the rapid growth in previous years, it has shown a slowing trend.

From a global trend perspective, the scale of global primary market financing reached its peak in 2021. The years 2020-2022 were the most active three years in unicorn history, with a new unicorn being born in less than two days on average. Starting in the second half of 2022, domestic and international equity investment markets gradually entered an adjustment and development phase, with fundraising and investment scales showing varying degrees of decline. The financing environment that unicorns rely on for growth has deteriorated, valuation bubbles have burst, the number of new unicorns has plummeted, and even many unicorns have fallen into a survival crisis. In 2023, the growth of the number and valuation scale of unicorns reached a new low in recent years, with a significant decrease in the number of new unicorns globally and in China.The New Mainline of China's Unicorn Ecosystem

As high-risk, high-return investment targets, the slowdown in the growth of unicorns is due to more cautious investors. According to statistics from Crunchbase, a foreign venture capital data platform, the funds flowing into unicorn companies have plummeted compared to the previous two years, making it difficult for unicorns to continue their rapid growth.

In the past two years, the scale of investment and financing in China's VC/PE market has been at a relatively low level in the past decade. This situation is caused by a variety of factors—global economic uncertainty, the decline in domestic and foreign economic growth rates, the rise in capital costs due to Federal Reserve interest rate hikes, geopolitical risks, Sino-US trade frictions and technology wars, and the strengthening of regulatory oversight over emerging and financial industries in China. These factors have collectively contributed to the bursting of the startup valuation bubble.

The philosophy of entrepreneurship and investment is also returning to a sober and rational state, no longer blindly pursuing growth and expansion, and paying more attention to the long-term value and profitability of enterprises. In recent years, Chinese tech giants that were keen on investing in startups have also begun to control their scale.

China's unicorn ecosystem is experiencing the end of the previous investment cycle and the beginning of a new one. "Industry support policies + government guidance funds/industry investment funds + state-owned investment institutions + track industries" have become a major trend in the development and evolution of China's unicorn ecosystem.

According to statistics from Zero2IPO Research, in China's equity investment market, the proportion of investment funds from state-owned institutions has risen from 10% in 2019 to 22% in 2023. Behind this trend is a structural change in the background of capital in the domestic primary market—state-owned investors' share is increasing, foreign capital's share is decreasing, market-oriented LPs are gradually disappearing, and US dollar VCs are withdrawing in large numbers. State capital and industrial capital that support national strategies and industrial development have become the main contributors to RMB funds, and the types of capital in the primary market have shifted to be dominated by policy-oriented LPs and industrial capital, with hundreds of billions and trillions of yuan in scale guidance funds being frequently established.

However, after the pandemic, the financial situation of local governments, which are the sources of risk capital, is tight. Coupled with the sluggish real estate market leading to reduced land sale revenues, the scale of funds available for investment in emerging enterprises has further contracted.

In terms of the scale of venture capital funds, since 2023, in the domestic market, there has been a continuous downward trend in terms of fund raising, investment amounts, the number of investment events, and the number of newly established investment institutions. The large number of investment institutions established in previous years are also undergoing a reshuffling, with the proportion of state-owned investment institutions gradually increasing and a more cautious investment style. From the national to the local level, more and more policies are being introduced to guide patient capital into the market.Government-backed funds tend to focus on specialized, innovative, and high-quality "little giant" enterprises that are key to local industrial development: those that focus on niche markets, have strong innovation capabilities, high market share, master core technologies, and excellent quality and efficiency; as well as projects that align with the national key support industries and can establish headquarters, factories, recruit workers, and pay taxes locally.

Guided by policy, venture capital investments in strategic emerging industries are no longer solely focused on the growth of valuations but have shown a significant trend of "investing early, investing small, investing in technology." The overall commercial transformation cycle for hard technology companies is longer and more difficult, leading to the emergence of new unicorns mainly driven by advanced hard technology-driven business innovations and soft technology-enabled industrial digitalization and intelligence.

Compared to the previous notion of "mass entrepreneurship and innovation," the technological attributes and commercial monetization capabilities of startups are now more valued. The focus of investment has shifted from financial innovation, consumer internet, and sharing economy concepts to strategic emerging industries and new quality productive forces with hard technology attributes, such as semiconductors, new energy, and high-end manufacturing, concentrating on technological innovation, solving "bottleneck" issues, meeting the needs for domestic substitution, and empowering the optimization and upgrading of the industrial structure of the real economy.

Under the new industrial cycle, technological innovation has become the main theme of the domestic investment market, with the electronic information industry becoming increasingly hot for investment and significantly leading other industries in terms of book exit returns. Among various sub-tracks, the semiconductor industry chain is the most active. Since 2023, the top five hot industries with the most investment cases are semiconductors and electronic equipment, IT, biotechnology/healthcare, machinery manufacturing, and clean technology/new energy.

In the hot spot, the popularity of generative AI has made artificial intelligence the hottest current business innovation trend, with opportunities in the industrial chain from infrastructure to commercial applications driving the continuous emergence of new unicorns. In the first quarter of 2024, the total financing amount for AIGC and AI industry applications has approached 20 billion yuan, surpassing new energy and ranking second only to the most popular integrated circuits in recent years.

The change in entrepreneurial direction has emerged to meet the new demands of the digital economy. With the gradual end of the mobile internet boom brought by smartphones, the once popular platform economic logic of "telling a good business story + financing + burning money for users + overseas listing" is no longer valid.

The growth strategy of the new generation of unicorns now needs to be more pragmatic and able to compete differently—under the background of rising capital costs, the "capital is strategy" model that prioritizes revenue growth over cash or profit creation is more difficult.

In the current environment, sci-tech innovation companies have been given a new mission—they need to more closely empower the real economy, whether it is soft or hard technology, and must demonstrate tangible technological content. "Scholar-type" and "expert-type" entrepreneurs with a strong academic background and R&D experience have begun to be favored by both capital and the market.The Dilemma of Unicorn Exits. On the other end of the market, the performance of many unicorns with inflated valuations has been poor after they entered the secondary market, which objectively has punctured the valuation bubble of unicorns. For Chinese unicorn companies, the regulatory oversight of A-share and U.S. stock markets has been strengthened for Chinese companies going public, the IPO (Initial Public Offering) threshold has been raised, and the A-share and Hong Kong stock markets have been sluggish, leading to a significant decline in the scale of IPO exits. Unicorn investors lack good exit channels and returns, making financing more difficult.

Comparison of Unicorn Ecosystems between China and Foreign Countries

In terms of the number of new unicorns, China still ranks among the top two globally, being a major engine for global business innovation. China once led the world in the number of new unicorns, but was surpassed by the United States starting in 2019.

The United States has a more mature and larger capital market and venture capital industry, with global innovation centers like Silicon Valley and the largest technology companies, providing a better foundation for the development of a unicorn ecosystem. The United States' previous loose monetary policy and the strong performance of the U.S. stock market in recent years have attracted a large amount of venture capital funds, also promoting the development of the U.S. unicorn ecosystem. According to data from Zero2IPO Research, the scale of China's equity investment market is only about one-tenth of the U.S. market.

There is a significant difference in the industry distribution of unicorns between China and the United States. In the past few years, Chinese unicorn companies had a high proportion of platform-sharing types, focusing on consumer internet. Now, as consumer internet has become more mature, Chinese unicorns are more distributed in the fields of artificial intelligence, advanced manufacturing, industrial internet, new energy, and semiconductor chips, while American unicorn companies are more distributed in financial technology, online tools, software services, artificial intelligence, and healthcare services, which are more on the soft side of service applications.

The U.S. venture capital market is also declining. According to statistics from the financing and investment data platform PitchBook, in 2023, even with significant investments in artificial intelligence startups, the financing amount of U.S. venture capital firms hit a six-year low, with a 30% drop to $170 billion, and the number of active U.S. venture investors decreased by 38%. At the same time, according to Zero2IPO Research data, the scale of equity investment markets in both China and the United States has declined, but China's decline is significantly larger.

Outlook for China's Unicorn Ecosystem

[The translation ends here as the original text also ends at this point.]In the global unicorn ecosystem, China's unicorns still hold the second place in terms of both quantity and overall valuation, with many unicorns boasting valuations that rank among the top internationally. However, beyond the sheer number of unicorn companies, we should pay more attention to the quality of these unicorns and the risks that lie behind the numbers. In recent years, there has been a significant inflation of overseas unicorns, leading to the emergence of many overvalued unicorns that lack actual demand, have flawed business models, or even engage in fraud, such as WeWork, which went bankrupt after going public, and the cryptocurrency unicorn FTX, which collapsed. Domestically, China has learned from past lessons in business innovation regulation and has done relatively better in risk control.

Despite a decline in the growth of Chinese unicorns, the technological content of current Chinese unicorns is significantly increasing compared to the numerous money-burning unicorns that emerged during the mobile internet era. This trend indicates that Chinese unicorns are transitioning from model innovation to technological innovation, placing greater emphasis on long-term development and the construction of core competencies.

The robust foundation of Chinese entrepreneurs and technical personnel remains an overwhelming advantage. In strategic emerging industries, the government has also provided strong support, which can offer continuous development momentum for hard-tech unicorns. This innovation ecosystem, combining government and market forces, provides strong support for the rise of Chinese unicorns.

Market downturns are also periods for the sedimentation of excellent companies; entrepreneurs and investors should delve into industries and refine their competitiveness. Many unicorn companies are in a stage of high growth and high losses, with weak profitability. In the crowded popular industry tracks, startups need to have sufficient resilience to face fierce market competition and high uncertainty in the external environment. Only those unicorns that can continue to innovate, optimize their business models, and improve profitability will stand out in future competition.

Looking ahead, the domestic substitution capabilities and overseas expansion capabilities of the new generation of unicorns will be more valued. To obtain overseas funding and explore new markets, many startups and unicorns with international competitiveness will actively venture abroad, hoping to reshape the global unicorn ecosystem. In the pursuit of internationalization, we need to pay more attention to emerging global technology applications and business innovations.

At the same time, we must be vigilant about the risks of overcapacity and overhype in popular industries and the risk of overvaluation of unicorn companies themselves. When advanced technology development is in its early stages, there is a huge room for imagination, which can easily lead to overheated speculation.

Therefore, we need to focus more on the long-term perspective of unicorn companies' ability to implement business innovations and their revenue capabilities—whether they have a high enough competitive barrier and a stable market share, whether their actual performance can meet valuation expectations, and whether their business models are sustainable.