Squaring Venture Capital Valuations with Reality

54 Pages Posted: 22 Apr 2017 Last revised: 9 May 2018

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2018

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 valuations average 48% above fair value, with 13 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 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.

Online Appendix is available at https://ssrn.com/abstract=2968003.

Keywords: Venture Capital, Unicorns, Valuation, Entrepreneurship

JEL Classification: G24, G32

Suggested Citation

Gornall, Will and Strebulaev, Ilya A., Squaring Venture Capital Valuations with Reality (February 27, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2955455 or http://dx.doi.org/10.2139/ssrn.2955455

Will Gornall (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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