Unicorn companies with IPO dreams might be in trouble

Since 2019, the number of billion-dollar, venture-backed companies in the world has grown from 223 to 704 with a combined value of $2.3 trillion. Becoming a unicorn has been the ideal for many tech startups: it feeds the ego, leads to more publicity, breeds confidence and ultimately works to attract top-notch talent and customers.

“It sort of certifies the company [and says], ‘We have arrived,’” says Jay Ritter, Cordell Eminent Scholar. 

Yet new research and a look at historical IPOs suggest that many of those companies may not be worth as much as they say. In fact, taking advantage of the way that “headline” valuations are calculated for these private companies, they may drastically overstate their value just to land the prestigious title of “unicorn.” 

On average, the headline valuation number overstates the value by more than 50 percent, according to research from several academic studies, including a new paper by Minmo Gahng, a University of Florida Ph.D. student who will join Cornell University as an assistant professor of finance. Add a frozen market for initial public markets, and things get harder to swallow.

Read more in this story from Utah Business.