The Rise Of The Unicorns – How Media Affects Start-Up Valuations

Severin Johannes Zorgiebel
Goethe University Frankfurt

July 2016


Within the last years, start-ups have achieved extraordinary high valuation levels which have never been seen in such dimensions before. These high-valued start-ups with valuations above or equal to US$1bn are also called unicorns. Similarly, media coverage of start-ups has increased significantly. In this paper the impact of media coverage on global unicorn valuations between 1990 and October 2015 is empirically analyzed. In addition, the impact of technology advancements on the media and start-ups is discussed. The here presented results indicate that technology advancements increase media coverage for start-ups. Investors which are typically not primarily active in the VC market are most affected by increasing media coverage. Start-up and especially unicorn valuations are driven to a large extent by increasing media coverage before a funding round. These results add new insights on the driving factors of start-up valuations and are consistent across a variety of different regression models and robustness checks.

The Rise Of The Unicorns – How Media Affects Start-Up Valuations – Introduction

Unicorns are a rare species. According to fairy tales, it is nearly impossible to see at least one of them in your lifetime. That is the reason why journalists, investors, entrepreneurs and other market participants call start-ups with a valuation above or equal US$1bn unicorns (Lee, 2013). With only a couple of employees, a basic business idea, no or only marginal revenues (not to speak of profitability), it should be hard to attract venture capital (VC) funding and achieve sky-rocketing valuation levels. Not even in the Dot-com phase, start-ups achieved valuations levels in the dimensions we see them nowadays. Nevertheless, times seem to have changed. As of October 2015, according to Crunchbase1, 153 start-ups are in the socalled “unicorn club”. Altogether, these VC-funded start-ups offer a current post-money valuation of about US$529bn with a total funding of US$79bn. This is about 10% of the entire NASDAQ 100 index or more than 40% of the German DAX 30 index market capitalization2. So, unicorns seem not to be too rare. Apparently, they are popping up in a nearly weekly manner or as the Fortune magazine stated: “They seem to be everywhere.” (Griffith and Primack, 2015)

Where are these unicorns coming from? What factors are relevant for this high valuation levels? This paper tries to empirically investigate the effect of media coverage on start-up valuations. Empirical evidence shows that media coverage is especially affecting investor behavior in an environment of high uncertainty (Hillert et al. 2014). Uncertainty is highly pronounced in the area of start-ups and VC valuations. Here, especially the effect for high valued start-ups (unicorns) is analyzed. This is the first empirical study which focuses explicitly on the unicorn phenomenon. In doing so, I first analyze the driving factors behind media coverage. Thereafter, I try to answer the question which investors are affected the most by the media. In the end, the effect of media coverage on unicorn valuations is tested. Univariate and a variety of multivariate regression analyses and robustness checks are used. Certain statistical and sample-related challenges are addressed. The global sample is primarily based on Thomson VentureXpert, Crunchbase and LexisNexis data for the time between 1990 and 2015.

Unicorns, Start-Up Valuations

The here presented results indicate that media coverage is positively affected by technological advancement. The technological change induced by the internet, mobile business, cloud computing or social media fosters the speed of communication and the amount of available information. Information asymmetries might be lowered. Apparently, non-PE/VC investors which are typically not very experienced in the field of VC investments are majorly affected by exceptional media coverage. These investors tend to be invested in start-ups with more media coverage and also with unicorn valuations. This finding might indicate some kind of valuation overreactions in the area of unicorns.

Based on the results, the rise of the unicorns seem to be significantly affected by increasing media coverage. High levels of media coverage might close information gaps between founders and investors. Lower information asymmetries might lower risk levels and increase valuations. In addition, based on Petkova et al. (2013), media coverage also serves as legitimacy for start-ups. Legitimacy should be more pronounced when media coverage is high. Brown and Wiles (2015) provided first descriptive findings that increasing later stage investments (so called “private IPOs”) and available VC capital are replacing IPOs in the start-up sector. I provide the first empirical and supportive findings on this relation. Moreover, I show that especially media coverage is one of the key drivers within unicorn transactions. As a result, media coverage might serve as a channel through which technology change affect financing and valuations of start-ups.

Unicorns, Start-Up Valuations

This paper contributes to different literature streams in the following way: First, it provides new evidence on a direct relation between technological change and media coverage of start-ups. Second, the findings extent the literature of media influence on start-up investors. Third, the paper adds new insights to the knowledge of media effects on valuation. Especially for extreme situations like current unicorn valuations. Forth, media coverage as a potential channel of how technology advancements affect start-up financing and valuation levels is introduced. Fifth, descriptive findings on the major drivers of the unicorn phenomenon based on Brown and Wiles (2015) can be supported based on first empirical tests in that area.

The paper is structured as follows: in Section 2, an overview of the literature and theories is provided. Based on that, hypotheses are developed thereafter. Section 3 deals with the used data and methodology to test the developed hypotheses. The results are presented in Section 4. Section 5 concludes.

Unicorns, Start-Up Valuations

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