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Private Valuations Aren't Grounded in Reality, Study Finds (bloomberg.com)

Posted by msmash on from the magic-trick dept.

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.

8 of 74 comments (clear)

  1. And the sky is blue... by jebrick · · Score: 2

    Who really believes the valuations given by these firms that just want someone else to buy them?

    1. Re:And the sky is blue... by Anonymous Coward · · Score: 2, Insightful

      Yeah, the only surprise to me is that it's only half of unicorns that are overvalued into the status.

    2. Re:And the sky is blue... by Mashiki · · Score: 4, Insightful

      Who really believes the valuations given by these firms that just want someone else to buy them?

      Suckers. Nothing more. Look over the last 10 years of all the tech companies that pre-IPO were valued more then companies which had physically manufactured products. Twitter is probably one of the best examples, and at one point was valued more then General Motors. Uber was valued more then Intel. Yeah, nothing but suckers.

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    3. Re:And the sky is blue... by WhiplashII · · Score: 2

      Um, something is worth what someone will pay for it. If the last investors bought 10% of the stock for $100M, the value is $1B. It's not like people are making this stuff up.

      What the article is really saying is that private investors in large private companies are willing to pay more than public shareholders. This is really just a legacy of Sarbanes Oxley.

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    4. Re:And the sky is blue... by ShanghaiBill · · Score: 2

      If the last investors bought 10% of the stock for $100M, the value is $1B.

      But if there is an investor contract that promises them 20% if the stock price goes down, then it isn't really worth $1B. It is only worth $0.5B.

    5. Re: And the sky is blue... by ceoyoyo · · Score: 2

      Not if the company management has an incentive to always make sure the pre-IPO valuation is unreasonably high.

  2. It's the economy, stupid by grasshoppa · · Score: 4, Insightful

    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! ).

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    1. Re:It's the economy, stupid by Actually,+I+do+RTFA · · Score: 3, Insightful

      The only reason economists' predictions don't have the same reputation as a meteorologist is because

      What a strange way to phrase it. Economists projections are regularly questioned, and the weather is well predicted on a 3-day, annual, and long term scale. Now, you get different granularities, but I find precipitation prediction works well on a 3 day scale, it does tend to be warmer in summer than the winter, and most years are the hottest years on record (lately).

      Weather benefits from the fact that clouds don't change behavior because we talk about them.

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