What Goes Up Can Go Down When It Comes to the Valuation of Large Private Companies, or Unicorns

When the Wall Street Journal reported earlier this month that private company Human Longevity’s valuation had taken a dive it did not surprise Ross Barrett, the co-founder of the Prime Unicorn Index (Index).

Barrett and the analysts at Prime Unicorn Index have refined the art of measuring the share price performance of U.S. private companies valued at $500 million or more by knowing exactly what information to look for and building out a network of entities that can provide such information. Prime Unicorn Index is offering an index that tracks the prices of approximately 100 unicorns and near-unicorns, or private companies valued at $500M – $1 billion or more, as a unique trading option for institutions and accredited investors that would like to bet long or short, or hedge their position in another investment.

Barrett believes Human Longevity may be just the start. “I saw private company valuations get hammered first hand in the dot.com boom and bust, as well as the 2008 aftermath. It’s like Ernest Hemingway said, bankruptcy happens gradually and then suddenly.” Many in the industry have forgotten that truism in recent years that valuations are cyclical as money poured into venture capital firms, angel investment groups, and crowdfunding sites, all in search of the next home run.

The volatility of such valuations is being fueled by market conditions, notes Allen Adamson, an Adjunct Professor of Marketing at New York University Stern School of Business who wrote about such trends in his book “Shift Ahead.

“Many companies, like Uber and Lyft, are creating a new category in which investors have become more interested in revenues than profits,” Adamson said. “There’s little consideration of the staying power of such companies. Instead, they care mostly about the first customers, who may be early adopters, and less so about where the next customers will come from.”

Edgar Radjabli, Managing Partner of Apis Capital Management, echoed that sentiment.

“There are many private companies that are very overvalued, primarily because as a private company they don’t need to be profitable,” said Radjabli. “VCs will still invest as long as revenues are growing. Combine that with the fact that there’s never any selling pressure on the stock.”

Radjabli added that the “most likely outcome of this is that companies will start to see their revenue growth stall out, and start to raise ‘down rounds’ from VCs who will be asking for much lower valuations. However, this is a process that takes time.

“More than likely, what we will see is companies start to raise some down rounds and then get acquired by a larger company. It’s not inconceivable for example, that Uber eventually runs out of steam (its YoY growth is already slowed according to confidential information off the record), and ends up falling back down to $20-30 Billion at which point it would make sense for it to become a target for Apple, Amazon and Google, all of who have a strong interest in automotive technology. That is why Uber is now pushing for an IPO, so that they can provide their shareholders an exit opportunity before the threat of down rounds begins to materialize in earnest.”

The trend has been building. In 2017, Stanford Graduate School of Business Professor Ilya Strebulaev published research, which showed that unicorns “report values on average about 51 percent above what they are really worth.”

Charles Mulford, of Georgia Tech’s Scheller College of Business, added that while we “cannot make a blanket statement that all private companies are overvalued,” we do “seem to be in a time where optimism about the prospects for private companies is high.  As such, valuations are generally high when compared with the valuations of public companies.”

Such concurrence on the part of experts points to continued correction, making PUI, and other alternative investment vehicles more attractive. Radjabli, for one, says PUI’s Index is the “most well-known” of the derivatives products that allow you to “short a ‘basket’ of private stock.” However, more are sure to follow.


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