Unicorn Accounting

Aswath Damodaran
New York University

Professor Damodaran, a true luminary in the valuation world, provides his insights into the proliferation of unicorns.

  • Should unicorns captivate the public’s attention?
  • Why does it matter how private companies are priced?
  • What, if any, risks do unicorns present to the broader economy if they implode?
  • What is the utility of calculating impairment charges, post-acquisition of unicorns?
  • What are the risks of placing hundreds of millions of dollars in the hands of young and unsupervised entrepreneurs?

Don’t miss this unique podcast with the godfather of company valuation.

Professor Aswath Damodaran, Stern School of Business, New York University

Aswath Damodaran holds the Kerschner Family Chair in Finance Education and is Professor of Finance at New York University Stern School of Business. Before coming to Stern, he also lectured in Finance at the University of California, Berkeley. Professor Damodaran is the author of several highly regarded and widely used academic texts on Valuation, Corporate Finance, and Investment Management.






New York University


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00:00:59 – What’s so special about a billion? Why not 800 million? And one thing to factor in is inflation alone can explain why a billion is becoming more common

Like everybody, everything else in business, there’s a good side and bad side. It’s good to have young businesses, have access to capital and be able to grow. And we live in an age of disruption, right? Every business is being disrupted, so from that aspect. I think it’s good that there is a climate where young companies are able to access capital and get high valuations when they go public.

The downside is when you have excess capital floating around and looking for opportunities, you’re going to see some companies being valued at numbers you shouldn’t be paying. But the question is, why should it matter to us what? What difference? I mean, i find this whole fixation that people have with what other people are paying to be extraordinarily unhealthy and completely useless.

What difference does it make to you and I that somebody pays a lot of money for a company that’s not worth that much? They they’re not investing in banks, so they’re going to bring the rest of us down. So in a sense, I think we need to stop worrying about what other people are paying and wringing our hands about.

Them overpaying, as long as you’re you and I are not overpaying. I don’t think it’s any of our business. So I think part of this is I think a change in economics where you’re seeing more stable businesses being disrupted, a lot of startups going after these businesses and some of them are deserving of the no of the billion dollar value tag that we’re attaching to unicorns, incidentally.

That billion dollar value tag is completely arbitrary, right? What’s so special about a billion? Why not 800 million? And one thing to factor in is inflation alone can explain why a billion is becoming more common. 25 years ago, duringthe.com boom, I’ll wager there were just as many unicorns.

The only difference is a Unicorn in the nineteen nineties would have needed to reach only 400 million to arrive at the same billion dollar valuation. So some of this is artificial and one final point, the way we you, we conclude that a business is worth a billion is we look at what a venture capital is invested and then we extrapolate from that.

In other words, VCU gets 5 % of a company for 50 million. We’re saying that must mean the company is worth a billion, but that is not necessarily true given the way venture capitalists get other things in addition to a share of ownership in the company.

00:09:48 – I don’t think the government the SEC should regulate this or get in between investors.

But when these are not in the tech business, the spillover effects in the tech business are really isolated to the people investing in the business.

There’s, there are other businesses we can argue about spillover effects, obviously financial service businesses and maybe the portion of the tech business that’s fintech, we need to worry about more when you access capital to enter lending businesses and you know, clarena, for instance, we pay now, you buy now and you pay later.

You can argue that segment of fit of technique. The reason I want to take the word problem up is we know what we do with prompts, right? We try to fix them. And the fix, then, is we need to protect investors from their own mistakes, so we shouldn’t let these. I think that’s absurd. The SEC has no business getting between a fool and his Murray money.

If you really want to invest in a company that you think is worth a billion, even if it’s worth only 100 million, who am I to stop you from doing?

But if there are there is a portion of this of technology where there is a spillover effect, then maybe we need to isolate our attention to those businesses rather than worry about all unicorns and the damage that they might do to the rest of us sure I agree with you. I don’t think the government the SEC should regulate this or get in between investors. But investors i think should be careful in managing their own money.

Maybe you can talk a little bit about the economics of a fund a venture capital fund funding a Unicorn. So if you have somebody like Adam Newman from we work now he has a new start up he goes and seeks capital at a venture capital. From let’s say he needs a lot of capital, hundreds of millions of dollars.

It’s easier, right, for a VC to invest hundreds of millions of dollars that has many billions of dollars under management.

If they make the right bet on a on a very large investment, the return on their whole portfolio will be very good. But they might need 100 positive returns on 2000000$ bets to deliver a high return on their entire portfolio. Anything you’d like to say along those?

00:34:47 – It is hard to manage 100 companies, or at least to supervise it

Yeah, it is hard to manage 100 companies, or at least to supervise it or to be. These for the most part are passive investors. They’re investing in companies which are very young companies. I mean they might, you know, take a look at and for the most part the way to think about these, especially if you’re looking at pre revenue companies, you’re investing in options, right?

That’s the way to think about it and you’re investing in options and if you’re investing in options and they’re out of the money options as many of these companies are, you know that 2/3 of young companies don’t make it through year 2.

What you have to do is hope that the winners in your portfolio. We’ll end up paying for your losers. That’s always been the nature of VC investment. You invest in 100 companies, 85 of them don’t win.

If you’re lucky, maybe 15 or 20 will win. But the big winners are winning big enough that they can cover the losers. It’s a very different mindset. That’s why an old time value investor cannot be VC investor, because there’s an old time value investor.

You’re taught to be risk averse, to minimize your losses and try to win on most of the companies invested. That’s not what a good BC thinks about when he or she looks at her at his or her portfolio.

00:40:16 – All pricing is created equal.

I think you’re making a good point about how we come up with the overall pricing of a company. We base it on a single VC investment and as you pointed out that single VC might be the stupidest person in the room. We’re extrapolating from that to the entire pricing of the company.

That’s why not all pricing is created equal, right? So if you have 10 companies claiming to be unicorns, but one is priced by three venture capitalists at a billion, the others price based on one venture capitalist.

I take the three over the one. And if two companies are priced by three venture capitalists and one is priced by somebody like, you know, a client of Perkins, VC of long standing, I’d probably put more credibility on it. Because remember these pricings? I’m not coming out of a traded market.

We have hundreds of transactions. You have a single transaction. You extrapolating from that transaction. You need to be cautious. But then the question is, again, why are you, why?

Why let it bother you, right. So in a sense, let’s say you take a stupid VC, you extrapolate from that pricing, you come up with a billion dollar price pricing for a company, you count it as Unicorn. You know who it helps?


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