Venture Backed Unicorns May Be As Much As 50% Overvalued

By Nick Fisher, Portfolio Manager


Venture capital has become an important driver of the economy and investment returns for many institutions. Even mutual funds have joined the party with the likes of Fidelity and T. Rowe Price having acquired the shares of pre-IPO companies in the private market within their mutual fund products. Now we are finding that these highly valued, venture backed companies may be as much as 50% overvalued. This is what professors Ilya Strebulaev (Stanford University) and Will Gornall (University of British Columbia) have said in their recently published paper.[1]

The reported valuations of these so-called "unicorns" have eclipsed over $600 Billion, a meaningful figure. The associated wealth creation has likely contributed significantly to the economic growth of the San Francisco Bay Area, Seattle and certainly other West Coast cities. If building cranes are a sign of economic growth, as the Seattle times has recently reported, then this is further evidence. If Strebulaev and Gornall are right then surely valuations will need to come down and an adjustment to reality will take place. The secondary effects of wealth destruction will surely be felt in those cities that benefited the most. 

At some point investors always flee yesterdays winners in search of tomorrows. We specialize in finding under appreciated and out of favor assets that will become tomorrow's winners.  

[1] Gornall, Will and Srebulaev, Ilya A. “Squaring Venture Capital Valuations with Reality.” July, 12 2017.