LONDON, United Kingdom — Privately-held start-ups valued at $1 billion or above were once as rare as unicorns, hence the label widely used for such companies in Silicon Valley and beyond. But in 2015, unicorns weren't such an uncommon beast. In fashion alone, Warby Parker, Farfetch and Rocket Internet-backed Global Fashion Group earned a valuation of $1 billion or above for the first time last year. Yet so far, this year, not one fashion company has entered the unicorn club.

A similar dynamic can be seen in the wider market.In the US, where the vast majority of unicorns are based, 43 private venture-backed companies earned valuations of $1 billion or above in 2015, according to data from Pitchbook, a database which tracks investment activity. Through the end of August of this year, only 11 such companies became unicorns.

In recent years, mega-funding rounds were common, enabling some start-ups to raise millions of dollars in venture capital before they had even launched a product, scoring sky-high valuations in the process. Low interest rates, which encouraged investors to channel money into venture capital, helped drive the trend. "We saw valuations get out of control because of that top-down dynamic where there's too much money in the system," says Chris Morton, co-founder and chief executive officer of Lyst, and a former investor at Balderton Capital and Benchmark Capital.

"Companies were raising every four, six months and doubling their valuation," says Frederic Court, founder and managing partner of Felix Capital, a digital lifestyle-focused fund. But the market has shifted. "These kind of things are not happening anymore. The market is calming down," adds Court.

Factors like the UK's 'Brexit' vote, the upcoming US election and terror attacks have bred uncertainty in the private and public markets. And after years of valuations based on growth and growth projections — which some companies failed to reach — investors are looking harder at whether a company has good margins, sustainable cashflow and a clear path to profitability, before laying down funding.

<span class="s1">There'</span>s no question the funding environment is going to be more challenging for companies going forward.

"This calendar year, the tone of the conversation has changed pretty dramatically," says Dave Gilboa, co-founder and co-chief executive officer of Warby Parker, which raised $100 million in a Series D funding round last April. "I think there is more appreciation of risk on the part of investors ... it has been a wake up for companies that assumed the music wouldn't stop."

"In the private markets, it was amazing how the mandate suddenly became from investors, 'Demonstrate that your business has solid fundamentals and can show a path to profitability,'" agrees Morton.

José Neves, founder and chief executive officer of Farfetch, adds: "Investors became extremely sophisticated at pinpointing the quality of the customer base of a company and how profitable the unit economics are. And if it doesn't look good, you won't get funding. It's as simple as that."

In Q2 2016, global funding for venture-backed companies edged up 3 percent to $27.4 billion after two quarters of declines, according to KPMG. However, much of this money went into a handful of celebrated companies like Uber and Snapchat and, overall, the number of venture deals dropped for the third consecutive quarter. Mega-financing rounds of the type that typically create unicorns also fell. Thirty-five funding deals worth over $100 million were struck in Q2 2016, a five-quarter low, down from 63 in Q2 2015.

For venture funds themselves, 2016 has so far been a "record year" for raising money, says Frederic Court. But while large-scale deals are still being struck (Farfetch, Deliveroo and TransferWise all raised large rounds this year, at valuations of more than $1 billion), "what we are seeing is people investing more in the companies they know, as opposed to taking risks," he adds.

This, plus investors doubling down on basic unit economics like profitability, is also making it harder for companies with very high valuations to raise additional capital without taking a hit on these numbers — especially if they haven’ t met performance projections. In the first nine months of the year, start-ups recorded 57 "down rounds" (in which they raised funding at a lower valuation than their previous round), compared to 22 in the same period in 2015, according to CB Insights.

Indian e-commerce company Flipkart, US flash sale site Gilt Groupe and Global Fashion Group — all of which are (or were) valued above $1 billion — had down events this year. After gaining unicorn status in 2011, Gilt's value dropped to $600 million in February 2015 and the company was eventually sold to Hudson's Bay for $250 million in January 2016. "In order to keep the business alive, it really had a slowdown in growth," says Sucharita Mulpuru, chief retail strategist at Shoptalk. "By the time they did that, the buyer they were able to find wasn't willing to pay their high valuation."

As investors become more sceptical of sky-high valuations, some companies are choosing to communicate their funding rounds differently. "It comes with a bit of a stigma," says Court. "There was probably way too much communication around valuation — valuation kind of became a goal, the centre of the attention." Back in May, Farfetch closed a $110 million Series F round. The company didn't disclose its valuation, but José Neves told BoF it was "definitely an up round" which, according to market sources, valued the company at around $1.5 billion.

The lack of exit opportunities may also be culling the number of unicorns. Only 18 venture-backed companies went public in the first half of 2016, compared to 46 in the first half of 2015, according to Thomson Reuters and the National Venture Capital Association. According to Neves, the lack of IPOs "contributed to investors sobering up" and becoming "much more conscious of valuations."

<span class="s1">We saw valuations get out of control because of that top-down&nbsp;</span>dynamic where there's too much money in the system.

Similarly, investors have been discouraged from funnelling money into companies with price tags so high that they would struggle to be acquired by larger enterprises. "We do see big corporates acquiring start-ups for $1 billion plus, but they're not necessarily acquiring unicorns at a fast clip — a trend that might signify current unicorns are overvalued, and acquirers don't believe they're worth the price tag,” says Zoe Leavitt, technology industry analyst at CB Insights.

Some of the troubles facing fashion unicorns relate the specific business model, sector or geographic factors. Flipkart's troubles included poor infrastructure (during its first annual Big Billion Day sale, its site and payment server crashed) and the entrance of Amazon into India's e-commerce market; Gilt's value fell as the flash-sale market became more crowded; and a damning BuzzFeed exposé revealed JustFab had fended off customer lawsuits and more than 1,400 Better Business Bureau complaints.

But generally speaking, business models that don't require a lot of physical infrastructure will find it easier to pivot from focusing on growth to profitability and keep hold of high valuations. E-commerce marketplaces like Farfetch, which doesn't hold physical inventory or own physical warehouses, distribution centres or delivery trucks, fit this bill. "There is nothing fundamentally in their business model that suggests that this won't work. If they cut out all their [investment in] marketing it should be a really profitable model," explains Sucharita Mulpuru.

According to Chris Morton, more disciplined valuations and vigilant investors are a good thing for the fashion-tech industry. "The bottom line is: good companies will still get funded when they can show they have good economics, but it'll probably be at a lower valuation," he says. "There’ s still a lot of money in the system waiting to deploy and companies which cannot show good economics will be the ones that are in trouble."

"There needs to be more justification for high valuations and large rounds of funding ... [It] is a good thing for investors and companies that there's a little more discipline around funding rounds," adds Dave Gilboa. "I think there’ s no question the funding environment is going to be more challenging for companies going forward."

Disclosure: Felix Capital is part of a group of investors which has a minority stake in The Business of Fashion.

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