Last May law firm Fenwick and West published an analysis of the 37 US unicorn deals that happened in the twelve months ending 31st March 2015. It’s an old post which I saw for the first time this morning.
Here’s the headline data on the deals:
- Mean valuation: $4.4bn
- Median valuation: $1.6bn
- 35% of companies had valuations in the $1.0-1.1bn range, indicating many companies negotiated specifically to get unicorn status
The headline finding was that the unicorn investors had significantly more downside protection than public market investors. All of the deals had a liquidation preference of 1x or more. This goes some way to explaining why we went through a period when late stage private companies were valued higher than their listed peers. However, whilst I haven’t seen a full analysis, I doubt this additional downside protection would be enough to explain all the difference in valuation. I think a bigger part of the explanation lies in deal dynamics – it’s easier for companies maximise valuation in private financing auctions than it is in IPOs.
However, few of the deals went beyond a simple 1x non-participating preference share. I always wondered if companies were accepting multiple liquidation preferences in exchange for high valuations, but that was only the case in 3% of the deals analysed. Similarly, only 5% of the deals had a participating preference share (in a participating preference share the investor gets their money back first and then participates pro-rata with other shareholders in any remaining proceeds).
Other protections were not that significant in number either. Only 30% of the deals had protection against a downround IPO, and protection against private downrounds was inline with venture industry standards (weighted average anti-dilution protection).
In summary, structuring and other fun and games was limited and the high valuations were pretty much what they appeared to be.
One other interesting titbit is that 75% of the rounds were led by hedge funds, mutual funds, sovereign wealth funds, corporates or other non-traditional investors in private companies. Money from these sources flows quickly in and out of markets and is now chasing other opportunities. It’s that more than anything which has been bringing the market down for the last six months.