Alternative Venture Capital: The New Unicorn Investors

Posted: 30 Apr 2019 Last revised: 20 Feb 2020

See all articles by Anat Alon-Beck

Anat Alon-Beck

Case Western Reserve University School of Law

Date Written: March 28, 2019


Elizabeth Anne Holmes was once celebrated by the press as the youngest female entrepreneur and billionaire, who dropped out of Stanford to start her own firm Theranos. Theranos quickly joined the prestigious “unicorn” club, and enjoyed the benefits of an “all-star” board of directors.

The unicorn bubble burst when the SEC charged Holmes with massive fraud. Holmes defrauded patients, doctors, investors, journalists, White House officials, military generals and employees. Holme is also scrutinized for various mismanagement claims. Theranos is not the only unicorn that gets press coverage these days. The CEOs of Uber and Zenefits also resigned lately due to various allegations.

Unicorn managers’ actions can have serious effects on economic activity. Monitoring unicorn managers is extremely important, because misbehavior, such as rent-seeking, corruption or other illegal activities, can not only hamper the manager’s decision-making process, but may also reduce the incentives and opportunities to invest in innovation in the future.

In 2019, it is projected that many unicorns will finally go public, but until recently, there was a sharp decline in the number of IPOs in the USA. Recent changes to the securities laws, provided incentives for unicorn founders to stay private longer, and for new market actors to invest in unicorn firms rather than in the U.S. public markets. As a result of these market and regulatory changes, there was a dramatic increase in alternative financing vehicles and new capital sources.

This Article explores a puzzle: how do the new nontraditional investors affect VC-backed startups corporate governance arrangements (such as voting rights, board composition and ownership structure)?

Unicorns are private companies that experience a transition from early stage to late stage to mega deals, and their new investors are accordingly affecting private ordering in the venture capital financing context.

The hypothesis is that there are new market conditions, specifically, new market actors, that change the traditional investment patterns in unicorns, and affect private ordering. The contractual mechanism that VC investors traditionally used to avoid opportunism by founders changed as a result of the intervention of these new market players. These changes give unicorn founders greater power vis-à-vis preferred shareholders and minority common shareholders to oppose a sale and keep the company private longer. New VC investment rounds are now structured as “friendly” financing rounds.

There is a need for policy reform and implementation of new corporate governance principles and practices for unicorn firms, in order to address the concentration of power in the hands of founders. The Article will also address the new UK Wates Corporate Governance Principles for Large Private Companies.

Keywords: Unicorn, Corporate Governance, Management, Securities, Public Markets, IPOs, Contracts, Private Ordering, Venture Capital, Wates

Suggested Citation

Alon-Beck, Anat, Alternative Venture Capital: The New Unicorn Investors (March 28, 2019). Available at SSRN:

Anat Alon-Beck (Contact Author)

Case Western Reserve University School of Law ( email )

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Cleveland, OH 44106-7148
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