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Unicorn valuations can be triple fair market value: Stanford study

Venture-backed unicorns boast of valuations in the billions, sometimes tens of billions, of dollars, but these eye-popping numbers can be as much as triple fair market value, says new research from Stanford University Professor Ilya Strebulaev.

The big-dollar post-money valuations that companies wave around can inflate their actual values by 30 percent to as much as 200 percent, Strebulaev said during a presentation at the Silicon Valley Open Doors conference in Mountain View, California, on May 26.

Ilya Strebulaev speaking at the Silicon Valley Open Doors conference in Mountain View, California
Stanford University Professor Ilya Strebulaev speaks at the Silicon Valley Open Doors conference. Photo courtesy of SVOD.

The disparity stems from the difference between the value of common and preferred stock, which venture investors receive for their investments.

Preferred stock is more valuable since it comes with protective terms, such as liquidation preferences, anti-dilution provisions and participation rights. These terms can guarantee a payback to preferred-share holders when common-stock holders walk away with little or nothing.

“Preferred shares are very different than common shares,” Strebulaev said. “We cannot compare, at all, the market capitalization of any publicly traded company with post-money valuation.”

The result is that the venture-capital unicorn herd, which Strebulaev estimated at one time included 436 companies globally, is not as large as it seems when it is adjusted for these terms.

More than 100 of these companies have post-money valuations below $1.6 billion, so their fair-market valuations are below the $1 billion cutoff to qualify as unicorns. (CB Insights reports that the current number of unicorns worldwide stands at 164.)

“If you think of fair value, 100-plus unicorns [are] culled from the herd,” he said. “This is the true state of the unicorns.”

Strebulaev and several academic colleagues recently surveyed 1,000 venture capitalists. Of them, 92 percent said that unicorns are overvalued and 75 percent said significantly overvalued, Strebulaev said.

Photo of a man wearing a unicorn mask taking a selfie courtesy Reuters/Mike Blake