One example receiving a lot of attention in the venture capital industry is the work by Ilya Strebulaev (Stanford GSB) and Will Gornall (UBC Sauder). The authors look at financial terms from legal filings of 135 U.S. unicorns – private companies with reported valuations above $1 billion – and find reported unicorn post-money valuations average of 48% above their fair value, with 13 being more than 100% above. The reason is that reported post-money valuations assume all shares are as valuable as the most recently issued preferred shares. However, most unicorns gave recent investors major protections such as IPO return guarantees, vetoes over down-IPOs, or seniority to all other investors. Common shares lack all such protections and are 56% overvalued. After adjusting these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.
Read abstract “Squaring Venture Capital Valuations with Reality” by Will Gornall and Ilya A Strebulaev, Journal of Financial Economics (JFE), forthcoming, at SSRN.