Private Market Hype vs. Public Market Reality: Unicorn Valuation Performance Over Time

open_access
Open Access
Author:
Makrides, Andrew
Area of Honors:
Accounting
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
Karl A Muller, III, Thesis Supervisor
Samuel Burton Bonsall, IV, Thesis Honors Advisor
Keywords:
Unicorn
Venture Capital
Start-Up
Valuation
Revenue
Overvaluation
Abstract:
In this paper, I examine the valuation performance of Venture Capital-backed Unicorn technology companies after their Initial Public Offering (IPO). Specifically, I use market capitalization-to-revenue ratios (valuation multiples) to predict third fiscal year-end valuation multiples. The aim is to determine whether overvaluation in pre-IPO Unicorn capital structure, outlined by Gornall & Strebulaev (2020), persists through revenue growth in the long term. To begin, I review prior literature on Unicorns, their early-stage development, overvaluation, and underperformance in public markets. Then, I identify key variables and valuation tools to evaluate the Unicorn's performance within the sample. I employ a log-transformed Ordinary Least Squares (OLS) regression model to test the relative predictive impact of early valuation multiples on third fiscal year-end valuation among the sample. The results of my regression model indicate a statistically significant association between high IPO valuation multiples and their long-term persistence. Second fiscal year-end valuation multiples are the strongest predictor of impact on third fiscal year-end outcomes, as revenue progression overtakes pre-IPO sentiment. Due to the underperformance of Unicorns in public markets, the findings help investors determine which Unicorns can maintain early expectations and sustain high valuations.