Private Valuations Aren't Grounded in Reality, Study Finds (bloomberg.com) 74
Unicorns aren't real, and neither are the valuations ascribed to many of the startups that say they're worth $1 billion or more, study finds. From a report: About half of private companies with valuations exceeding $1 billion, known as unicorns, wouldn't have earned the mythical title without the use of complex stock mechanics, according to a study by business professors at the University of British Columbia and Stanford University. The tools used to negotiate a higher share price with investors often come at the expense of employees and early shareholders, sometimes drastically reducing the actual value of their stock. The chasm between public and private valuations is a topic of increasing prominence following several disappointing listings. Among them is Blue Apron Holdings, which is trading well below the price venture capitalists paid in the last fundraising round. An often-overlooked explanation for the divide is buried in investor contracts. Blue Apron, which delivers meal kits to customers, gave stock preferences to Fidelity Investments and other backers in 2015 in exchange for a $2 billion valuation. The shares included a provision to receive additional equity if an initial public offering is set below a target price. Investors took advantage of the mechanism after Blue Apron's mediocre IPO.
And the sky is blue... (Score:2)
Who really believes the valuations given by these firms that just want someone else to buy them?
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Yeah, the only surprise to me is that it's only half of unicorns that are overvalued into the status.
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Um, something is worth what someone will pay for it. If the last investors bought 10% of the stock for $100M, the value is $1B. It's not like people are making this stuff up.
What the article is really saying is that private investors in large private companies are willing to pay more than public shareholders. This is really just a legacy of Sarbanes Oxley.
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If the last investors bought 10% of the stock for $100M, the value is $1B.
But if there is an investor contract that promises them 20% if the stock price goes down, then it isn't really worth $1B. It is only worth $0.5B.
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The value of everything is subjective.
If people want it then it worth more products that people don't want.
Re: And the sky is blue... (Score:2)
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The companies are getting those valuations from the VCs by agreeing to terms that protect the VCs and screw all the smaller investors.
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Not if the company management has an incentive to always make sure the pre-IPO valuation is unreasonably high.
Re:And the sky is blue... (Score:5, Insightful)
Who really believes the valuations given by these firms that just want someone else to buy them?
Suckers. Nothing more. Look over the last 10 years of all the tech companies that pre-IPO were valued more then companies which had physically manufactured products. Twitter is probably one of the best examples, and at one point was valued more then General Motors. Uber was valued more then Intel. Yeah, nothing but suckers.
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valued more then companies which had physically manufactured products.
So? There is nothing magical about "physical manufacturing" that should make a company valuable. If anything, the opposite is true. It is better to own the IP and outsource the physical work.
Twitter ... at one point was valued more then General Motors.
GM makes commodity products, competes with cheap overseas labor, and has burdensome legacy costs. I would expect their valuation to be near zero.
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So? There is nothing magical about "physical manufacturing" that should make a company valuable.
No? Let's look at the previous dotcom crash, and compare it against the current tech bubble. The question you should be asking is, who's going to be getting money to buy your product if you're not manufacturing anything.
GM makes commodity products, competes with cheap overseas labor, and has burdensome legacy costs. I would expect their valuation to be near zero.
Except the part where they have quarterly sales high enough to give GAAP 0.05-0.15/share in return right? They have physical assets, IP, manufacturing base. Do you get why they have market valuation that's considered reliable, compared to twitter which has only IP and produces...nothing.
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Who really believes the valuations given by these firms that just want someone else to buy them?
Suckers. Nothing more.
Just as likely people who think they're taking advantage of the greater fool theory [wikipedia.org] a la Tulipomania [wikipedia.org]. (Bearing in mind I'm pretty sure hardly any of the people involved actually thought tulip bulbs were really worth anywhere near the sums involved).
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Care to remind me exactly what Facebook is manufacturing?
Marketing data. That's somewhat useful, if you're trying to sell something.
It's the economy, stupid (Score:5, Insightful)
What is "reality" anyway? Economies are built on nothing more than perception; on the small scale, how much widget X is worth to person Y. On the larger scale, it's run by "feelings" ( how much I feel this company will make long term ).
Sure, we dress it up with pretty graphs and we all stand around in serious suits pretending we know what the hell we're talking about, but any economist will tell you it's all about perception and mood.
The best we can hope for is rationalizing after the fact.
The only reason economists' predictions don't have the same reputation as a meteorologist is because, generally speaking, we are all on the same bus and want to get to the same place ( more money. Hello greed! ).
Re:It's the economy, stupid (Score:4, Insightful)
What a strange way to phrase it. Economists projections are regularly questioned, and the weather is well predicted on a 3-day, annual, and long term scale. Now, you get different granularities, but I find precipitation prediction works well on a 3 day scale, it does tend to be warmer in summer than the winter, and most years are the hottest years on record (lately).
Weather benefits from the fact that clouds don't change behavior because we talk about them.
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Weather benefits from the fact that clouds don't change behavior because we talk about them.
I dunno, we do have the butterfly effect [wikipedia.org].
Both weather and markets are incalculably complex, and small changes do make big differences over the long term - whether the tiny gust of air from somebody talking about the weather in London, or some kid buying his first share of stock.
I'm aware that the link explicitly states that the impact of the butterfly effect on weather is overstated... but the point is that even small changes in air current does change the weather as time progresses.
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Economies are built on nothing more than perception... it's all about perception and mood.
The best we can hope for is rationalizing after the fact.
To an extent, but at the same time, we should acknowledge that there is such a thing as poor judgement and terrible predictions. You can say, "There's no objective measure of value," but if someone pays $10,000 for a normal slice of Wonder Bread, we can say that they overpaid. If they bought it because they predicted the cost of Wonder Bread would skyrocket in the next two days, we can say that was a bad prediction.
I mean, yes, value is never completely objective, and there's always uncertainty to predic
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You can say, "There's no objective measure of value," but if someone pays $10,000 for a normal slice of Wonder Bread, we can say that they overpaid.
"Value" is in the eye of the beholder. People spend ungodly amounts of money on stereo equipment, for instance. Sums and values which rival your slice of bread, btw. Yet they are entirely happy with their purchase, so who am I to say any different?
There is no objective measurement of perceived value, which is what the economy runs on.
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I don't want to get too deeply philosophical here, but what do you think you're talking about when you use the phrase, "objective measurement of perceived value"? That seems like a dumb, nonsensical phrase to me.
Some things are more valuable than others. That much is true. It's possible to judge value incorrectly. I can think that something is worth $10k and be wrong about that. But I've never claimed that there's an "objective measurement of perceived value." I don't think you know what you're talki
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I don't think you know what you're talking about.
I don't think you fully understand what I'm saying, personally. If you did, you'd understand why your 10k slice of bread is a meaningless analogy.
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I'm pretty sure I understand. You think that things need to have an "objective measurement of perceived value" in order to have the possibility of assigning value outside of "what someone is willing to pay". That is, you'd probably claim that in my example of someone paying $10k for a slice of bread, the slice is inherently worth $10k because someone was willing to pay that much, and there's no other meaningful way to talk about value.
That's my guess, anyway, from the nonsense talk about "objective measu
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As I mentioned in a different comment, that term was incorrect. However, you did seem to get the gist of my comment so it's a moot point.
Regardless, by virtue of someone willing to pay 10k for widget X, that assigns value to it. I don't see how debating the value after the fact changes the assigned value.
Explain that to me, I'm legitimately curious. If two parties agree to payment terms and close the transaction successfully, how does anyone else's rationalization change the value inherent in that transa
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how does anyone else's rationalization change the value inherent in that transaction?
What value is "inherent" in the transaction?
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The agreed upon price between the parties. If Person A agrees to buy Widget X from Person B for 10k, the inherent value of Widget X is 10k.
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... the inherent value of Widget X is 10k.
Ok, so what does that word "inherent" mean in that context? Earlier, you brought up the phrase "objective measurement of perceived value". Is the "inherent" value some kind of objective value, or objective measurement of value?
Because I think I might have an idea of the mistake that you're making. You're saying that there's no "objective measurement of perceived value", but what you really want to say is that nothing has "objective value", and that all value is a matter of perception. But then, you al
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There is no objective measurement of perceived value, which is what the economy runs on.
Nonsense.
You absolutely can objectively measure value, in both individual and aggregate cases. The measurement will not be a single number, it will be a probability distribution, and the distribution will vary over time, but that makes it no less a real, objective measurement. What you're measuring is human demand and desire, and that is a real, objective thing, even if it's variable across the population and across time, and even if it is hard to measure accurately.
If you measured the value of a slice
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Basically, you're confusing "objective" with "fixed and universal".
Fair enough and you're quite correct. In fact, while reading your post I realized there's a very quick and obvious way to determine an objective measurement of perceived value; how much someone is willing to pay for it. :)
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That's not how it is meant to work though. The idea behind the 'worth' of widget X is that it is at least marginally comparable to some widget X2 produced by a different competitor in the market. Each competitor tries to find a way to make their product worth slightly more than their competitors or for a cheaper cost, and the customer ultimately decides whether they agree with that effort. However, if each competitor cannot do that, then prices simply fall to the cost of manufacturer/supply plus a profit ma
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That is largely true, but there are also patterns to perception and results of perception. These patterns can be studied to make statistical predictions. Human behavior can be modeled to some degree in aggregate. I agree the models are not perfect and that's partly why economists are often wrong.
However,
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Sure, we dress it up with pretty graphs and we all stand around in serious suits pretending we know what the hell we're talking about, but any economist will tell you it's all about perception and mood.
All of these revelations won't change a damn thing. We'll still pay glorified tarot-card readers millions of dollars to manage portfilios, that reality distortion field around Wall Street will continue to be maintained by Greed N. Corruption, and all the computing power in the world won't be able to predict or avoid the next collapse.
Find something that actually devalues "complex stock mechanics", preventing it from shitting out billion-dollar valuations. Then we'll be making progress.
It's the economists, stupid (Score:2)
I am reminded of a fascinating interview I heard last year with two economists, and the interview was entitled, "It's the economists, stupid," a play on the classic phrase you quoted as your subject. Their point in the interview was that "the markets" have taken on an almost anthropomorphic character in our thought and economy. And economists have become the new oracles to tell us what the markets "say" and where the value lies, replacing the ancient ones that would tell people the moods of the gods so the
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What is "reality" anyway?
It's subjective perception. My perception is that you don't exist nor does this post. In fact, what you don't realize is that you typed this post in an altered state of consciousness. You're just talking to yourself.
What's more plausible, that or materialism? You decide.
Didn't Gregory House teach you well enough? (Score:2)
Everybody lies.
-- Dr. Gregory House, M.D.
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Yes and no (Score:1)
By definition, if a willing buyer pays $1B to a willing seller for 50% equity, the company is valued at $2B at that instant in time.
The fair-market valuation a moment later is unknown - it is whatever a willing buyer would pay a willing seller for equity in the company.
The big problem with private-company valuations is they are like art, real estate, rare coins, and other things that aren't traded on a daily basis: it's always just a guess - an educated guess - what the true value is.
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The stock market does exactly the same thing. A companies valuation is based on the price of the last stock market transaction times the number of outstanding shares. The variance is also huge. This is the reason why one rogue trader can tank a companies stock. It is also the reason why a short selling hedge fund can also tank a companies stock.
The key difference between public and private sales is liquidity. The public market is much more liquid. An ecosystem of financial traders exist. These trade
As a long-time investor, I agree (Score:1)
Having participated in hundreds of IPOs over the decades, I'd tend to agree with this analysis. Probably about 50 percent of the public or private offerings I looked at were not viable long term, usually predicated on a lack of both competition and regulation, both of which would exist.
That said, if you actually read the offerings, you'll find they disclose such things. Sometimes a good idea can in fact be a wise investment.
That's the whole purpose of the stock market (Score:2)
We know private valuations are crap. It is too hard to decide how much things like "brand", "Expertise", "Experience", and "Business Secrets" are worth. Enter the stock market.
The concept of an accurate market (Score:2)
Backed by rational thought and informed actors has to die.
People do stupid things all the time.
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And they should suffer from it. Stupid should hurt. Pain is the only thing stopping stupid.
File this under... (Score:2)
Old News (Score:2)
Bloomberg had a nice article on this a while back:
(Apparently they paywalled it so Im posting the google cache version)
https://webcache.googleusercon... [googleusercontent.com]
Fidelity mentioned 44 times in SEC IPO doc (Score:2)
Willing buyer at arms length (Score:2)
So... fraud? (Score:2)
If Fidelity and others are adjusting their valuations based on compensation from the entity that they're evaluating, how is that not fraud?
There is an assumption that a private valuation is based on the fair, rigorous analysis of the company and its place in the market. If they are taking money (profit) to adjust their valuation (deceit), that's stretching into fraud territory. It's almost textbook that deceit + intent + profit = fraud.
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