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Unicorn technology companies are overvalued by an average of 48 percent a study of scientists from Stanford


Image: TED Conference , CC BY-NC 2.0

In April 2017 published an article Will Gornalla from the University of British Columbia and Ilya Strebulaeva Stanford called "We bring venture business assessments to reality." In it, scientists analyzed the estimates of more than hundreds of world-famous companies (including technological ones) with an estimate of one billion dollars or more (the so-called "unicorns").

It turned out that these estimates do not always correspond to reality and can be repeatedly overstated. We publish the main findings of this study.
What's the problem
Venture capital is an important driver of economic growth and an important financial tool. For example, since the late 1970s of the last century, 43% of American companies that entered the exchange before their IPO were funded by venture investors.

Historically, the most successful companies with venture financing went to the exchange for a period of 3 to 8 years from the time the first money was raised. However, over time, the situation has changed, and now more and more such companies prefer to remain private, and can grow to huge sizes without entering the exchange - among them, for example, Uber, AirBnB and Pinterest, estimated at tens of billions of dollars.

The growth of such companies gave birth to the term "unicorn" - this is the name for companies with venture financing, the valuation of which exceeds $ 1 billion. The term should also reflect the rarity of this phenomenon, but at the beginning of 2017 there were 200 unicorns in the world, and 113 such companies are located in USA.

Despite the growing importance and availability of venture financing, the evaluation of unicorn companies is still a black box. This is partly because of the natural complexity of assessing fast-growing, liquid companies. However, in many respects the reason for the complexity of the financial structures of companies attracting venture financing. Understand this sometimes difficult not only to external observers, but also to insiders who are as close to business as possible. Therefore, scientists from Stanford and the University of British Columbia decided to develop their own methodology for evaluating unicorn companies, which could show their real value.
Research Procedure
As Ilya Strebulayev told the Republic edition, the valuation model is based on the pricing model of options. Researchers took into account the sums of the latest investments and valuation of companies, as well as financial contracts.

As a result, 116 companies were analyzed, among them Airbnb, Lyft, Magic Leap, Snap, WhatsApp, Uber and many others. And so, to what conclusions scientists came.
Unicorns are overvalued, on average, by 48%
According to the results of the assessment, based on the developed model, it turned out that the average revaluation of unicorn companies is 48% - the average rating of companies from the list was at the level of $ 3.5 billion, while its "honest" value should not exceed $ 2.7 billion.

image

The figure shows the distribution of the revaluation of companies' value. The revaluation of ΔV is defined as the percentage by which the company's current valuation exceeds its "fair" value calculated by the financial model of scientists

As a result, 52 out of 116 unicorn companies would have to lose their status if their valuation is brought to real numbers.
Thirteen unicorns from the list are overvalued by more than 100%
A number of companies from the list were overvalued by more than 100%. Among them:


SolarCity - the company Ilona Mask in March 2012 was revalued by 178% ($ 1.9 billion)
Square - the service of the creator of Twitter Jack Dorsey in September 2014 was estimated at $ 6 billion - that's 169% higher than his fair price;
Box - in July 2014 was worth $ 2.6 billion, while the real price should not exceed $ 800 million, the final revaluation at 200% ;
CloudFlare - the service in June 2015 was valued at $ 3.2 billion - which is 103% higher than the fair price.
There are unicorns with an almost honest estimate
In spite of everything, scientists managed to find companies whose estimates almost correspond to their real value. Among such projects, for example, the service AirBnB, which in 2015 was estimated at $ 30 billion, which is "only" 15% higher than the fair price. Also here, scientists mention Uber - with a capitalization of $ 68 billion (May 2016), the excess of fair value was only 8%.
Conclusion
The US Securities and Exchange Commission (SEC) is not delighted with the situation with unreasonably inflated estimates of technological unicorn companies. As SEC Chairperson Mary Joe White said: "We are afraid that the tail is wagging the dog here - that is, there are fears that in the pursuit of the prestige of having a high score, companies are trying to present themselves as a more valuable asset than it really is."

As an illustration of the words of the functionary, the authors of the study give an example of the company Ilona Mask SpaceX. In 2008, the company raised money to develop a program to launch satellites and develop services for space travel. Despite the fact that it was the height of the financial crisis, and the NASDAQ index was then seriously declining, the company managed to hold a round of investments and raise money at a price of $ 3.88 per share, and a few months earlier in the previous round in March 2007, the price of one share was determined in $ 3.

Since then, SpaceX has been successfully developing, has become a successful company, and not so long ago attracted another round of investments already at a price of $ 77.46 per share. However, in 2008 its shares were evaluated higher only because its management wanted to show its importance to new investors, and this rise in price was not due to anything, scientists believe.

image

The value of the estimate and the real price (blue dotted line) of SpaceX company - in 2008 there is a serious discrepancy

In the end, as the co-author of the study, Ilya Strebulayev, said in an interview: "Both investors and entrepreneurs need to pay more attention to the conditions in which the market is located. It is very important to consider exactly what securities are offered to you. In the world of venture capital investments there are a lot of them, and each assumes different cash flows and level of control. "
MeLavi 27 september 2017, 9:19
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