Are unicorns overvalued?

Written by Mark Evans

Pitchbook blogger Anthony Mirhaydari has pointed out that several major ‘unicorn’ technology companies are ‘overvalued’.

Mirhaydari points to academic research arguing that many unicorns are overvalued by an average of 50 per cent if the distinctions between common and preferred shares and ‘riders’ granted to late-stage investors are taken into account. This assertion is based on a study co-authored by Will Gornall at the University of British Columbia and Ilya Strebulaev at Stanford University.

In essence any successful IPO profits all investors, but a poor exit will result in late-stage investors enjoying a relatively larger payout, a differential that is nor ‘priced’ in valuations.

Gornall and Strebulaev conclude that 15 unicorns in the US are carrying valuations more than twice above fair value.

Those will most to lose will be the startup employees with junior share class holdings unaware that those big-time late series valuations may not fully apply to them should things take a negative turn.