Why unicorns are overvalued? (and the industry knows it...)

The cumulative unrealized value of current US unicorns is approaching $600 billion, per PitchBook data. And, the sad part is that, most of it is based on outright lies, the market and investors know about!

So why is this happening? Why are people lying about the valuation of their businesses? And, more importantly why do investors invest in over-valued and under performing businesses even though they know about this deceit?

The problem isn’t that humans don’t know what’s good for them: we have the basic outline for risk awareness (all humans do). We know that walking is better than driving, and we’re better off reaching for a carrot than a cookie. Yet, the short-term gratification habits of exhilarating choices—pleasure and gratification, over-indulgence and excess—are more enticing than smart ones, which may take years to be seen and felt. Thus people who vested in investors will be losing billions of dollars in the next few years when this short term bad habit will take it's toll...

There is a great book to read about the decision making process (and how flawed our decisions can be...) Nudge: Improving Decisions about Health, Wealth, and Happiness by Thaler and Sunstein.

These “incentive conflicts” (Shall I make a safe bet or go with the Uber investing crowd? or better yet buy some Bitcoins? decision conflicts) reveal the tension that makes it difficult for humans to choose the best thing. “It’s particularly hard for people to make good decisions when they have trouble translating the choices they face into the experiences they will have” says Richard H. Thaler (recent Nobel laureate) and Cass R. Sunstein, authors of Nudge. They argue that “choice architecture”, or the designated organizational context in which people make decisions, can go a long way in prompting people to make better decisions. And that is part of the habit forming side of humans, where habits are very hard to change. “When choice is complicated and difficult, people might greatly appreciate a sensible default.” This is especially true when we realize that people tend to go with the default option.

Who are the victims in all this? For one, vested startup employees with junior share class holdings unaware that those big-time late series valuations may not fully apply to them should things take a down-turn. This is something we could be on the verge of seeing play out with SoftBank's tender offer for Uber shares, which is expected to come in at a 30% discount to the company's last private valuation amid ongoing scandals and lawsuits and the billion plus loss! Second, the investors, they will wake up one day and realize their investment is worth much less (or nothing at all in some cases... like Theranos and good old Juicero...) than what their perceived value of the firm was all about!

Sometimes, even in these rosy and euphoric market conditions, things really are too good to be true.

Article from PitchBook: https://pitchbook.com/news/articles/why-unicorns-are-overvalued-and-the-industry-knows-it 

Here is another article about this problem from Bloomberg Busines: Goldman Sachs warns that the highest valuations since 1900 mean pain is ahead https://www.bloomberg.com/news/articles/2017-11-29/goldman-warns-highest-valuations-since-1900-mean-pain-is-coming 

Happy investing...

Hal Tezcan

Co Founder Startup Port