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Squaring Venture Capital Valuations with Reality

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  • Strebulaev, Ilya A.
  • Gornall, Will

Abstract

We develop a valuation model for venture capital-backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post-money valuations average 48% above fair value, with 14 being more than 100% above. Reported valuations assume that 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 initial public offering (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.

Suggested Citation

  • Strebulaev, Ilya A. & Gornall, Will, 2019. "Squaring Venture Capital Valuations with Reality," Research Papers 3849, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3849
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    Cited by:

    1. Gompers, Paul A. & Gornall, Will & Kaplan, Steven N. & Strebulaev, Ilya A., 2020. "How do venture capitalists make decisions?," Journal of Financial Economics, Elsevier, vol. 135(1), pages 169-190.
    2. Kwon, Sungjoung & Lowry, Michelle & Qian, Yiming, 2020. "Mutual fund investments in private firms," Journal of Financial Economics, Elsevier, vol. 136(2), pages 407-443.
    3. Dominika Gajdosikova & Katarina Valaskova & Tomas Kliestik & Maria Kovacova, 2023. "Research on Corporate Indebtedness Determinants: A Case Study of Visegrad Group Countries," Mathematics, MDPI, vol. 11(2), pages 1-30, January.

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