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.
Table of Contents
1. Introduction
2. Literature Review
2.1. VC Valuation Drivers
2.2. Unicorns
2.3. Effects of Media on Organizations and Investors
2.4. Technology and Media
2.5. Media and VC Valuations
2.6. Hypotheses
3. Data and Methodology
3.1. Data
3.2. Methodology
3.2.1. Model (1) – LN Media Coverage / Day
3.2.2. Model (2) – % of Non-PE/VC Investors
3.2.3. Model (3) – Unicorn
3.3. Exceptional Media Coverage
4. Results
4.1. Univariate Results
4.2. Multivariate Results
4.2.1. Media Coverage
4.2.2. Non-PE/VC Investors
4.2.3. Unicorns
4.3. Robustness Section
4.3.1. Sample Split, Sub-Sample and Other Robustness Checks
4.3.2. First and Last Time Unicorns
4.3.3. Two-Stage Least-Squares Regression
4.3.4. Different Valuation Measures
5. Conclusion
6. References
Objectives and Research Themes
This study empirically investigates the impact of media coverage on global start-up valuations between 1990 and 2015, with a specific focus on the "unicorn" phenomenon. It examines how technological advancements influence media coverage and explores whether increased media attention leads to valuation overreactions, particularly among less experienced investors.
- The relationship between technological progress and increased media coverage for start-ups.
- The impact of media coverage on the behavior and investment patterns of non-PE/VC investors.
- The role of media coverage as a key driver of unicorn valuations and legitimacy.
- The identification of market factors, such as "private IPOs," that contribute to high unicorn valuations.
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1. 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 Crunchbase, 153 start-ups are in the so-called “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 capitalization. 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.
Summary of Chapters
1. Introduction: Outlines the rise of unicorn start-ups, the central research objective regarding media's role in their valuation, and the methodology used to investigate these dynamics.
2. Literature Review: Discusses existing research on VC valuation drivers, the unicorn phenomenon, the influence of media on organizations, and the intersection of technology, media, and finance.
3. Data and Methodology: Details the dataset construction from multiple sources (Thomson VentureXpert, LexisNexis, etc.) and describes the econometric models used to test the three central hypotheses.
4. Results: Presents both univariate and multivariate findings, confirming the positive relationship between media coverage, technological advancement, and unicorn valuation, alongside various robustness checks.
5. Conclusion: Summarizes the study's findings, highlighting that media coverage and technological change are significant drivers of unicorn valuations and suggests directions for future research.
6. References: Provides a comprehensive list of academic and industry sources cited throughout the paper.
Keywords
Valuation, Venture Capital, Unicorns, Start-ups, Media, Technology, Private Equity, Information Asymmetry, Investor Behavior, Market Overreaction, Technological Advancement, Financial Economics, Legitimacy, Private IPOs, Investment Cycles.
Frequently Asked Questions
What is the core subject of this research paper?
The paper investigates the impact of media coverage on global start-up valuations, specifically focusing on the emergence and valuation of "unicorns"—start-ups valued at US$1 billion or more—between 1990 and 2015.
What are the central thematic fields covered in this study?
The research integrates three distinct academic fields: the role of technological advancement, the influence of media coverage on market participants, and the mechanics of venture capital (VC) and unicorn valuations.
What is the primary research goal?
The primary goal is to empirically determine if and how media coverage acts as a driver for unicorn valuations, while also testing if technological advancements accelerate this effect.
Which scientific methods are utilized in this work?
The author employs univariate differences-in-means tests and multivariate regressions, including OLS, logit, and firth models, to analyze the relationship between media, investors, and start-up valuation levels.
What does the main body of the paper address?
The main body reviews the literature to develop hypotheses, explains the methodology of data collection and regression analysis, and presents empirical results to support the derived hypotheses regarding media influence on valuation and investor behavior.
Which keywords characterize this work?
Key terms include Valuation, Venture Capital, Unicorns, Media, Technology, Private Equity, Information Asymmetry, and Investor Behavior.
How does technological advancement relate to unicorn valuations?
The study finds that technological change increases the speed of communication and information availability, which in turn boosts media coverage, thereby potentially lowering perceived risk and increasing valuations for high-growth start-ups.
Who is most affected by the media coverage analyzed in this study?
The research indicates that non-PE/VC investors, who generally possess less experience in the specific VC market, are more heavily influenced by media coverage and "buzz" compared to traditional venture capital investors.
What is the significance of the "private IPO" market mentioned in the paper?
The paper highlights that increasing later-stage private investment is replacing traditional IPOs, and this shift is one of the driving forces behind the high valuation levels of unicorns.
How does the author address the potential issue of endogeneity?
The author uses a two-stage least-squares regression with the geographical distance of a start-up's headquarters to San Francisco as an instrumental variable to account for the potential endogeneity of media coverage.
- Quote paper
- Dr. Severin Zörgiebel (Author), 2016, The Rise of the Unicorns. How Media Affects Startup Valuations, Munich, GRIN Verlag, https://www.grin.com/document/469422
