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Private Valuations Aren't Grounded in Reality, Study Finds (bloomberg.com)
Unicorns aren't real, and neither are the valuations ascribed to many of the startups that say they're worth $1 billion or more, study finds. From a report: About half of private companies with valuations exceeding $1 billion, known as unicorns, wouldn't have earned the mythical title without the use of complex stock mechanics, according to a study by business professors at the University of British Columbia and Stanford University. The tools used to negotiate a higher share price with investors often come at the expense of employees and early shareholders, sometimes drastically reducing the actual value of their stock. The chasm between public and private valuations is a topic of increasing prominence following several disappointing listings. Among them is Blue Apron Holdings, which is trading well below the price venture capitalists paid in the last fundraising round. An often-overlooked explanation for the divide is buried in investor contracts. Blue Apron, which delivers meal kits to customers, gave stock preferences to Fidelity Investments and other backers in 2015 in exchange for a $2 billion valuation. The shares included a provision to receive additional equity if an initial public offering is set below a target price. Investors took advantage of the mechanism after Blue Apron's mediocre IPO.
Who really believes the valuations given by these firms that just want someone else to buy them?
What is "reality" anyway? Economies are built on nothing more than perception; on the small scale, how much widget X is worth to person Y. On the larger scale, it's run by "feelings" ( how much I feel this company will make long term ).
Sure, we dress it up with pretty graphs and we all stand around in serious suits pretending we know what the hell we're talking about, but any economist will tell you it's all about perception and mood.
The best we can hope for is rationalizing after the fact.
The only reason economists' predictions don't have the same reputation as a meteorologist is because, generally speaking, we are all on the same bus and want to get to the same place ( more money. Hello greed! ).
Mod me down with all of your hatred and your journey towards the dark side will be complete!
No wait - I think that was my O face.
This is news? As soon as snapchat reached "ludicrous speed" valuations it should've been blatantly obvious to anyone.
But this is a perfect demonstration of economic value - one part hype, one part what people are willing to spend (and somewhere in there the actual raw value). This is why socialist economic systems get out of whack with centralized command centers dictating the "value" of something when the people in charge are just as susceptible to the same wide-eyed valuations and greed. Energy is worth X, medicine is worth Y (why? Because we say so), Soylent Green floats with the population....
Blue Apron's stock was hit hard recently when Amazon mentioned they might enter the meal delivery space. So not only a mediocre IPO, but then getting hit with a 25% or 30% drop just the other day.
Everybody lies.
-- Dr. Gregory House, M.D.
Of course they're trading low. Amazon is about to enter their market and destroy them with their shipping infrastructure and economy of scale.
By definition, if a willing buyer pays $1B to a willing seller for 50% equity, the company is valued at $2B at that instant in time.
The fair-market valuation a moment later is unknown - it is whatever a willing buyer would pay a willing seller for equity in the company.
The big problem with private-company valuations is they are like art, real estate, rare coins, and other things that aren't traded on a daily basis: it's always just a guess - an educated guess - what the true value is.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Having participated in hundreds of IPOs over the decades, I'd tend to agree with this analysis. Probably about 50 percent of the public or private offerings I looked at were not viable long term, usually predicated on a lack of both competition and regulation, both of which would exist.
That said, if you actually read the offerings, you'll find they disclose such things. Sometimes a good idea can in fact be a wise investment.
-- Tigger warning: This post may contain tiggers! --
I guess now we have a scholarly paper quantifying it.
We know private valuations are crap. It is too hard to decide how much things like "brand", "Expertise", "Experience", and "Business Secrets" are worth. Enter the stock market.
excitingthingstodo.blogspot.com
Circa 450 BC, Democritus said that: "A thing is worth whatever someone is willing to pay for it."
Well, OK, I'm pretty sure he didn't say it in English, but that is still the foundation of capitalism.
Backed by rational thought and informed actors has to die.
People do stupid things all the time.
There's "investing" and then there's investing. The former is the way things used to be done which is to spend your time learning a particular industry and then making educated investments that target long term return on your investment. This type of activity has served Warren Buffet and others very well. The problem is it's hard work. Buffet, for example, doesn't just review the financials of companies he's looking invest in or acquire. He visits them, meets with their staff and then he also meets with other companies in the same industry to learn more about them and the industry as a whole. It's still a gamble but you put a lot of effort into making sure you understand as much about the risks as you can and minimize them.
The new investing is focus purely on the short term "pop", make a quick return and then get the f*ck out of dodge. This is what drives IPO's and algorithmic trading, those investors could care less about how a company performs in 5-10+ years or even if it will be solvent and that's a major problem with today's market. The vast majority of the "market makers" are not investing in the classical sense but the market still tries to pretend like they are. No one at Fidelity seriously believed Blue Apron was ultimately worth $2 Billion, but they thought they could get it there in early trading, cash out and then laugh at all the dumb schmucks who are stuck with stock that's underwater.
The only way to fix this nonsense is to set it up so that initial stakeholders investment vests and they can only cash out a percentage every quarter and stretch it out. If banks are required to still hold 50% of their original investment at least 24 months after the IPO and can only fully cash out after 48 months or more then you're going to start seeing valuations that are closer to "reality".
DUH!
Isn't Amazon about to embark on a journey to deliver meal kits to Prime members?
That would be game, set, and match, if you ask me. I've had Blue Apron's stuff and the food is mediocre at best. It won't take much to do better. Add Prime and voila, you no longer have to plan your meals a week in advance. This is good for Millennials who a) have no problem overpaying for things and b) never make up their minds until the very last possible moment.
Bloomberg had a nice article on this a while back:
(Apparently they paywalled it so Im posting the google cache version)
https://webcache.googleusercon...
Fidelity is mentioned 44 times here: https://www.sec.gov/Archives/e... . But I suspect the information one needs to fully understand the agreement between Fidelity and Blue Apron is in the referenced and non-public "Investor's Rights Agreement". The article certainly doesn't make it clear what documents it referenced to draw its conclusions or how to detect such hidden agreements in future offerings.
If a willing buyer who has no other ties to a company pays 1B for 50% of a company at that instant the company is worth 2B. However if a group of investors own 100% of the outstanding stock of a company, and then issue 1% more shares which they then buy for 20M the company market capitalization would be 2B. However no ownership changed hands in that transaction. All that happened was 20M was put into the company. The investors where not true buyers. There are a lot of other funny things that go into pre IPO valuations. So unless the company is publicly traded or you see a true new investor who isn't getting something else along with their stock purchase, many of these valuations are invalid.
I am reminded of a fascinating interview I heard last year with two economists, and the interview was entitled, "It's the economists, stupid," a play on the classic phrase you quoted as your subject. Their point in the interview was that "the markets" have taken on an almost anthropomorphic character in our thought and economy. And economists have become the new oracles to tell us what the markets "say" and where the value lies, replacing the ancient ones that would tell people the moods of the gods so they could get better crops. Economics is certainly a branch of psychology not mathematics, though, as you say, they try to wrap it up in some mathematical rationalization and modeling. Can you mathematically model psychology? Yes to a degree. We can even make a formula that lets us value and trade debts themselves! It works because the math says it works!
If Fidelity and others are adjusting their valuations based on compensation from the entity that they're evaluating, how is that not fraud?
There is an assumption that a private valuation is based on the fair, rigorous analysis of the company and its place in the market. If they are taking money (profit) to adjust their valuation (deceit), that's stretching into fraud territory. It's almost textbook that deceit + intent + profit = fraud.
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According to the latest ruleset, this post should be modded as Vorpal Flamebait +5.
As Facebook demonstrated, the IPO is now treated as a pump-n-dump scheme. If a business were truly valuable, the banks would be setting the share price low so they could act as scalpers; re-selling the shares to mum-n-dad investors who in turn, will be waiting 15 years to make a profit on their investment.
Don't forget, this also applies to that person running our country claiming to be worth over 8 billion dollars.
just duh