NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Squaring Venture Capital Valuations with Reality

William Gornall, Ilya A. Strebulaev

NBER Working Paper No. 23895
Issued in October 2017
NBER Program(s):   AP   CF   PR

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.

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Document Object Identifier (DOI): 10.3386/w23895

 
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