Overvaluation of Startups

In 2013, venture capitalist Aileen Lee coined the term unicorn to describe startups worth more than $1BN and less than a decade old. While unicorns were meant to be a term for the rare and almost mythical start-up, there are so many unicorns now that they are no longer rare in the startup world. More and more companies are crossing the $1BN mark, earlier and faster. For example, yesterday, we wrote about the most highly-valued company in the US, Stripe, which currently sits at a $115BN valuation. The company passed the $1BN mark in 2014, 4 years after it was founded, and sits at a pinnacle just over a decade since its inception.

A look at history
Not all overvalued companies live up to their expectations. In fact, many don’t. WeWork is a clear example of an overvalued startup gone wrong. At its peak, the company was worth $47BN after a Series H funding led by Softbank. But this valuation went fast south after the company opened its books prior to listing publicly and it became clear how upside-down were its economics and how much money the company was losing. 

Profit vs. Growth Potential
Even today, many companies that IPO are not profitable. Both ride-hailing companies Uber and Lyft became public companies while still being billions of dollars in the red, and many public investors still saw and continue to see their potential, considering factors such as the cost to duplicate the product or service the startup offers. Consider that Amazon lost money for 6 straight years before it finally turned a profit and saw the stock take off.

Overvaluation in 2021
The rise of SPACs is creating a unique bubble of overvaluation, especially in industries like autonomous vehicles, where every company is looking to be “the next Tesla.” Two EV companies who have gone public via SPAC have already been criticized for faking their potential, and it remains to be seen if any of these companies can live up to their public expectations.