Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/276244
Year of Publication: 
2023
Series/Report no.: 
CFR Working Paper No. 23-04
Publisher: 
University of Cologne, Centre for Financial Research (CFR), Cologne
Abstract: 
We show that mutual funds report their junior stakes in startups at 43% higher valuation than model fair values that consider multi-tier capital structures of startups. The latest-issued and most senior security is worth 48% per share than junior securities held by mutual funds, implying that mutual funds mark junior securities close to par with the senior securities. Our findings are robust to model assumptions. Identical valuations reported for dual holdings of senior and junior securities imply 37% discrepancy in implied values of the firm. Overvaluation is lower for fund families with longer experience in private startup investments, and higher for junior securities purchased in secondary transactions. Overvaluation declines after down rounds (new financing rounds with purchase prices lower than previous rounds) and near IPOs. The results are consistent with mutual funds neglecting the probability of negative outcomes in which junior securities are paid less than senior securities and overweighting successful exits where all securities convert to common equity and are valued equally.
Subjects: 
Startup valuation
Mutual funds
Venture capital
Fair value
Private valuation
JEL: 
G23
G24
G28
G32
Document Type: 
Working Paper

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