The unicorn killer: Why regulatory risk keeps destroying startup value and what to do about it

In the intricate world of private equity and venture capital, firms dedicate substantial resources to dissecting market trends, evaluating competitive environments, and appraising management teams prior to making significant investments. They engage in profound analyses of financial forecasts, undertake rigorous due diligence, and pursue meticulous negotiations to secure protective covenants. However, many players in this field are currently underestimating a critical threat to their portfolio returns: regulatory and narrative risk—changes in policy, fluctuations in enforcement, and public perception can swiftly dismantle even the most robust business strategies.

A pertinent example comes from AI chipmaker Cerebras Systems, which submitted its IPO application last September with the expectation to secure $1 billion at an $8 billion valuation. However, the company found itself in a precarious situation, depleting cash reserves for months due to a regulatory review caught in limbo, stemming from staffing shortages within federal agencies. Once Cerebras finally received clearance from the Committee on Foreign Investment in the United States (CFIUS) in March 2025, the market landscape had substantially shifted. This scenario illustrates a harsh reality: regulatory setbacks not only stall initiatives—they can also tarnish them.

For some innovators, the challenges extend beyond mere delays and encompass the threat of outright bans. Numerous urban mobility companies attained unicorn status with unprecedented speed, only to witness their multibillion-dollar valuations plummet as municipalities initiated wholesale bans or imposed rigorous restrictions on their operations. After a rapid debut on the stock market through a special purpose acquisition company (SPAC) in 2021, a prominent dockless scooter operator found itself overwhelmed by regulatory challenges across multiple U.S. and European cities. This regulatory pressure ultimately led to its delisting from the New York Stock Exchange in September 2023 due to a market capitalization drop below $15 million, culminating in bankruptcy just three months later. Another significant player suffered an acute setback when Paris, its most profitable city, completely banned e-scooters in 2023, following a public vote. Meanwhile, in Washington D.C., local regulatory leaders imposed severe restrictions on fleet sizes and capped speeds, diluting consumer utility to the rate of an average electric wheelchair.

Ticket resale behemoth StubHub provides yet another illustration of how regulatory risks can devastate corporate valuation. The company reported $93.9 million in legal and regulatory costs for 2024, as disclosed in its S-1 filing with the Securities and Exchange Commission. This figure almost doubled from the $48.2 million recorded in 2023. StubHub has faced legal actions from multiple state attorneys general concerning alleged “drip pricing” tactics, while the D.C. Attorney General initiated a separate lawsuit alleging “bait-and-switch” practices in July 2024. As a result of growing regulatory uncertainty, StubHub’s long-delayed plans for an IPO, which aimed for a staggering $16.5 billion valuation, continue to stall. Furthermore, these regulatory expenses now account for approximately 5% of the company’s annual revenues.