Mutual Fund Investments in Unicorns over Time:

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Mutual Fund Investment Performance over Time:

Unicorns are no longer startups, they are sophisticated enterprises. Mutual funds recognized this and have been investing in unicorns for a while now.

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"However, in spite of their economic relevance and the attention they command, Unicorns are still regarded as ‘black boxes’ in many ways. This is largely due to their unique combination of institutional features. They are young and high-growth startup companies that run large-scale operations with hundreds or thousands of employees. By the time they surpass the $1bn valuation threshold and officially join the Unicorn ‘club’, their business models are oftentimes still in nascent and unprofitable stages. In these early stages, venture capital supports their growth. In later stages, frequently around the time they reach Unicorn status, other institutional investor groups join in, such as sovereign wealth funds, mutual funds, and strategic investors. Their roots in venture capital also explain idiosyncrasies in their funding structures. As for all startups, capital is provided via staged financing in funding ‘rounds’, and the equity stakes are granted via convertible preferred shares comprising an array of complex rights which may differ across funding rounds. Finally, and largely due to all aforementioned features, the very thing that defines them, their valuation, is frequently subject to controversy."

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"As we observe that Unicorns issue a variety of share classes with differing rights which are priced differently, we can show that the ‘one’ valuation of a Unicorn oftentimes does not exist. Inferring the company value from the valuation of the latest funding round, as is the norm in venture capital markets, is therefore potentially misleading. This finding can offer valuable guidance to investors and regulators alike on how to measure and interpret Unicorn valuations. Second, we document the strong reciprocal and positive effect Unicorn valuations have on each other, and how diminished the role of performance-related factors is in this dynamic. This result empirically underpins the widely observed valuation exuberance in Unicorn markets, and offers a caveat for a potential downward spiral should one or more Unicorn valuations start to decrease."

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"The second important ‘reference’ is the change in valuation of competitor Unicorns, either in between funding rounds or at the closing of a new funding round. Unicorns are complex assets in illiquid markets, and the absolute number of existing Unicorns is still fairly low. To find a peer Unicorn which is sufficiently similar in size, maturity, investor rights or profitability in order for its absolute valuation to be a meaningful point-reference seems therefore unlikely, and it will be nowhere near as precise as the value-based reference points typically used in public equity markets, such as the 52-week stock price high. Consequently, it seems more likely that the reference effects will manifest themselves through valuation changes. In a very heuristic way, a change in the valuation of one Unicorn will cause a subsequent change in another – peer/competitor – Unicorn. We believe this relationship is positive: following the logic of the reference- and anchoring theories that prices gravitate towards reference points (as shown e.g. by Baker, Pan and Wurgler, 2012, with stock prices), a price increase (decrease) in one Unicorn should trigger a subsequent price increase (decrease) in another Unicorn."

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