Working Paper: NBER ID: w23895
Authors: William Gornall; Ilya A. Strebulaev
Abstract: We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns – private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuation average 50% above fair value, with 15 being more than 100% above. Reported valuations assume 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 a IPO return guarantees (14%), vetoes over down-IPOs (24%), or seniority to all other investors (32%). Common shares lack all such protections and are 58% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.
Keywords: Venture Capital; Valuation; Unicorns; Contractual Terms
JEL Codes: G13; G24; G32; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contractual terms (L14) | overvaluation of unicorns (D46) |
| complexity of financial structures (G32) | overvaluation of unicorns (D46) |
| contractual terms (L14) | actual cash flows and valuations (G19) |
| reported postmoney valuations (G24) | actual value of venture capital-backed firms (G24) |
| complexity of financial structures (G32) | perceived value of companies (D46) |