Do Unicorns Exist?
A “unicorn” is a private company with a valuation of over $1Billion. As the moniker suggests, the chance that a company will ever achieve this type of valuation is mythical (almost). Some unicorns that you may have heard of include, UBER, Airbnb and Pinterest. Only a handful of Canadian companies have achieved unicorn status. However, a recent study may have called the status of some of these companies into question.
A study from National Bureau of Economic Research (NBER) suggests that many unicorn companies may, in fact, be greatly overvalued. It is difficult to accurately valuate growth companies and the problems are compounded as the complexity of their capital structure increases. Companies relying on venture capital often have many different types of shares because of the frequency in which they raise capital.
Post-money valuation is a metric that is often employed when referring to VC backed companies. Post-money is calculated after the injection of new capital by multiplying the per-share price of the most recent financing by the total number of common shares (including options and convertible shares). The problem with using post-money valuation in in VC backed companies is that not all share classes are created equal, and therefore should not be assigned the same value. The NBER study estimates that the average unicorn is overvalued by 50%.
Valuation issues aside, there are private companies that are undoubtedly worth more than $1Billion and should rightfully be called unicorns. My current favourite is Magic Leap, which had yet to release a product but has earned itself a $6Billion dollar valuation and has raised over $1.4billion in equity.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.