Our new article is a revisitation of an important study on so-called venture capital unicorns that we posted on last year. Our immediate reason was that the article didn’t appear to have the impact that it warranted, so we wanted to do our little bit to help. But as you’ll see, the study had bigger implication that I managed to miss on the initial write-up.
If you are so disposed, please comment at New York Magazine as well as here. Thanks!
You might think that a study demonstrating that venture capital-funded “unicorns” are overvalued, and by a stunning 48 percent on average, would shake up the industry. Yet “Squaring Venture Capital Valuations With Reality,” a paper announcing just that finding by Will Gornall and Ilya A. Strebulaev (professors at the Sauder School of Business at the University of British Columbia and the Stanford Graduate School of Business, respectively), received only a perfunctory round of coverage from some important investment and tech publications when it was published.
It’s no surprise that a study casting doubt on the worth of darlings like Lyft and Cloudflare didn’t move investors or change the venture capital industry. Trade press reporters don’t have much of a future if they take to biting the hands that feed them, and the investors with overpriced wares don’t want to admit they’ve been had, or, worse, that they’re part of the problem. But write-ups of this important paper, with its sensational finding, missed that the authors’ analysis is deadly for the venture capital industry as a whole.
The median venture capital fund loses money. Only the top 5 percent of funds earn enough to justify the risks of investing in venture capital. The nature of venture capital is that the performance of those few successful funds in turn rests on the spectacular results of a small fraction of the investments in a particular fund. Gornall and Strebulaev’s finding that the performance of the winners — and even the also-rans — is overstated further undermines the already strained case for investing in venture capital. If you are Joe Retail and think this isn’t your problem, think twice. If you invested in high-growth mutual funds, your holdings probably include shares in large venture-capital-backed private companies.
How does this pervasive overvaluation come about in the first place? Once you understand it, it’s breathtakingly simple.
Story continues here. Thanks again!