Squaring venture capital valuations with reality |
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| Institution: | 1. University of British Columbia, Sauder School of Business, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada;2. Stanford University, Graduate School of Business, 655 Knight Way, Stanford, CA 94305, USA;3. National Bureau of Economic Research, 1050 Massachusetts Ave., Suite 32, Cambridge, MA 02138, USA;1. Vanderbilt University. VU Station B, Box 351819, Nashville, TN 37235, USA;2. KAIST College of Business. 85 Hoegiro, Dongdaemun-Gu, Seoul 02455, Republic of Korea;1. University of Chicago Booth School of Business United States;2. Stanford University Graduate School of Business United States;3. University of North Carolina Kenan-Flagler Business School United States;1. CEPR, United Kingdom;2. Institute for Financial Management, University of Bern, Office 214, Engehaldenstrasse 4, Bern CH - 3012, Switzerland;1. Babson College, 320 Tomasso Hall, Babson Park, MA 02457, USA;2. Boston College, Fulton Hall, Room 330, Chestnut Hill, MA 02467, USA;1. Technical University of Munich, Arcisstraße 21, 80333 Munich, Germany;2. University of Oxford, Saïd Business School, Park End Street, Oxford, OX1 1HP United Kingdom |
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| Abstract: | We develop a valuation model for venture capital–backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post-money valuations average 48% above fair value, with 14 being more than 100% above. Reported valuations assume that all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as initial public offering (IPO) return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%). Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status. |
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