Squaring venture capital valuations with reality
By Will Gornall, Ilya A. Strebulaev. Journal of Financial Economics, 2020
155 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/bb5203dc3472032d2923eb403ca58302bb643a2d
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Citations in the corpus
- Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance (2019, background): “More recently, a number of studies have questioned these valuations and suggested that some of them are structured to make the fi rm appear to be worth more than $1 billion, when in fact this is not the case (Gornall and Strebulaev 2017; Fan 2016).”