Do Investors Overvalue Startups? Evidence from the Junior Stakes of Mutual Funds

71 Pages Posted: 1 May 2023 Last revised: 15 Feb 2025

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University - J. Mack Robinson College of Business; University of Cologne - Centre for Financial Research (CFR)

Brad M. Barber

University of California, Davis

Si Cheng

Syracuse University - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Harshini Shanker

London Business School

Ayako Yasuda

University of California, Davis - Graduate School of Management

Date Written: April 21, 2023

Abstract

Mutual funds overvalue their junior stakes in startups by 53% compared to fair value models that account for multi-tier capital structures. Junior securities are marked close to senior securities, despite the latter being worth 58% more per share. Mutual funds overpay in secondary purchases relative to model fair values. Overvaluation is not justified by ex-post exit outcomes and does not decline over time or vary with VC boom-and-bust cycles. Mutual funds’ valuation updates are more correlated with model fair values after a down round. The findings suggest mutual funds underestimate downside risks for junior securities while overweighting IPO exit scenarios.

Keywords: Startup valuation, Mutual funds, Venture capital, Fair value, Private valuation, Startup financing

JEL Classification: G23, G24, G28, G32

Suggested Citation

Agarwal, Vikas and Barber, Brad M. and Cheng, Si and Hameed, Allaudeen and Shanker, Harshini and Yasuda, Ayako, Do Investors Overvalue Startups? Evidence from the Junior Stakes of Mutual Funds (April 21, 2023). Available at SSRN: https://ssrn.com/abstract=4425744 or http://dx.doi.org/10.2139/ssrn.4425744

Vikas Agarwal

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street,
Suite 1234
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://https://sites.google.com/view/vikasagarwal

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Si Cheng

Syracuse University - Department of Finance ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244
United States

HOME PAGE: http://si-cheng.net/

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=1

Harshini Shanker

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Ayako Yasuda (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.ayakoyasuda.com

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