The Us and Them of Investing in Unicorns

WeWork’s fall from grace seems to have been a temporary setback in the unicorn world.

- Shuli Ren

Case in point: Just days into the new year, a source familiar with China’s social-media/e-commerce startup Little Red Book told Bloomberg News it would begin a fundraising round aiming for a $6 billion valuation, double what it was worth after its last round, in 2018.

But do this and similar eye-popping valuations reflect the real value of these startups? According to a recent study published in the Journal of Financial Economics, the average unicorn is priced 48% above its fair value. Looking at 135 unicorns in the U.S., the authors found valuation inflation in every case, with the degree of overstatement ranging from 5% to 188%.