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AI Unicorns Gone Bust: Rise and Fall of Tech Billion-Dollar Darlings

Last Updated February 20, 2024 10:06 AM
Giuseppe Ciccomascolo
Last Updated February 20, 2024 10:06 AM
Key Takeaways
  • Despite high valuations and funding, several artificial intelligence (AI) startups have collapsed.
  • This suggests achieving unicorn status doesn’t guarantee long-term success. 
  • Investors are shifting their focus from mere potential to proven value propositions.

While the world applauds the emergence of new unicorns in the artificial intelligence (AI) sector and the substantial investments made by big tech companies to advance AI, there’s a tendency to overlook the numerous startups that, despite achieving significant capitalization, ultimately succumbed to bankruptcy in their pursuit of AI excellence.

Is the failure solely attributed to funding challenges? Or does it underscore deeper issues with the viability of the products they were offering?

What Is An Unicorn?

The term “unicorn” denotes a privately held startup company valued at over $1 billion, a concept popularized by venture capitalist Aileen Lee. Unicorns are exceptionally rare and symbolize innovation within the venture capital industry, typically attracting private investors or venture capitalists.

While many unicorns eventually pursue an initial public offering (IPO) to access growth capital, founders may opt to remain private to retain control, albeit limiting growth potential and necessitating creative means to provide returns to investors.

Unicorn exit options include remaining private to retain control, although this can restrict growth potential and require inventive methods to satisfy investor returns; going public via an IPO, providing access to capital for growth, albeit potentially diluting ownership; or enticing a buyer to achieve goals more swiftly than remaining private or going public.

Aileen Lee, founder of Palo Alto-based Cowboy Ventures, introduced the term in her article  “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups.” She analyzed software startups from the 2000s, estimating that only 0.07% reached a $1 billion valuation. Lee likened finding such startups to discovering mythical unicorns due to their extreme rarity

How Many AI Unicorns Collapsed?

The most famous collapsed unicorn is Babylon . The company, specializing in telemedicine services, filed for bankruptcy and was placed under receivership following recent events that effectively signaled the project’s failure. In early August, as TechCrunch reported, the company’s American shares experienced a significant devaluation, leading to insolvency. Previously valued at over $2 billion, the company had raised a total of $1.2 billion, according  to Crunchbase.

BuzzFeed , the New York-based pioneer in clickbait content, made waves in early 2023 with its increased focus on AI-generated content production and publication. However, despite the buzz, Wall Street’s response was lukewarm. And BuzzFeed shares now trade at around 22 cents each, at their all-time low.

Metromile , renowned for its pay-per-mile auto insurance policies paired with tracking devices, raised substantial venture funding before going public in early 2021. Despite its emphasis on AI capabilities, the San Francisco-based company struggled in the public market. It was then acquired by fellow insurtech company Lemonade at a valuation lower than its cash balance.

The List Continues

AppHarvest , headquartered in Kentucky, pursued a tech-centric approach to indoor crop cultivation, particularly focusing on tomatoes. Initially attracting investor interest, it secured over $100 million in venture funding and additional capital through a SPAC merger. However, despite investments in AI-driven farming technology, AppHarvest filed for bankruptcy in July last year.

Embark Technology , also known as Embark Trucks, achieved a staggering valuation during the SPAC boom, boasting an initial market cap exceeding $5 billion. The San Francisco-based company aimed to revolutionize long-haul trucking with machine-learning technology for self-driving capability. However, shares plummeted by over 98%, leading to a decision to wind down operations this year and sell assets at a fraction of their former value.

Berkshire Grey , based in Bedford, Massachusetts, positioned itself at the crossroads of AI and robotics, focusing on automating supply chain and e-commerce fulfillment operations. Going public via SPAC in 2021 at a $2.7 billion valuation, the company witnessed a rapid decline in share values. In early 2022, key investor SoftBank agreed to take the company private. It acquired the 71% it didn’t already own for $375 million.

It’s Not Just a Funding Matter

This is just a list of listed startups that aimed to shine in the AI sector. Even in private markets, certain once-prominent AI startups have experienced underwhelming performance and witnessed declines in their valuations. And they likely won’t be the last.

However, isolated instances of startup setbacks don’t provide a comprehensive assessment of whether the recent surge in AI-related investment will yield substantial returns for venture capitalists. Throughout every technology cycle, some ambitious startups flourish, while others falter, and some persist despite challenges. It seems that this time is no exception.

Anyway, have they collapsed due to a funding issue or for a offer problem? According  to Erin Griffith of the New York Times: “Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.”

Venture investors emphasized  that failure is an inherent part of the entrepreneurial journey. They highlighted that for every company that closes its doors, there’s a potential for an extraordinary success story akin to Facebook or Google. However, with numerous companies struggling and showing signs of impending collapse after years of stagnation, investors anticipate more substantial losses due to the significant cash injections made over the past decade.

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