Purpose
The purpose of this analysis is to continue to explore former unicorns:
- How do the valuations of former unicorns compare across countries?
- How do exit strategies compare?
- Are there exit methods that are more advantageous to founders?
Unicorns are private start-up companies that are worth $1 Billion US or more. Unicorns used to be rare but from 2020 to 2021, the number of new unicorns increased by three fold. The subject matter is a continuation of my first project.
Data Collection
Data from Kaggle website:
https://www.kaggle.com/datasets/prasertk/former-unicorn-companies
Raw Data Cleaning
The data set is a list of 184 former unicorn companies:
- Added two columns of date calculations: 1) Difference between exit date and last valuation 2) Difference between last valuation (US$B) and exit valuation
- Removed 48 rows with missing values (163 observations remaining)
- Removed 13 rows where last valuation date was after exit valuation date (150 observations remaining)
Creating a Smaller Data Set
Top Countries
I used a bar chart to determine the top 5 Countries based on number of companies. I decided to keep the countries of US, China, India, UK, Israel and Sweden, with 128 observations remaining.
Top Exit Reasons
I used a bar chart to determine the frequency of exit reasons. I decided to analyze only the top 3 exit reasons.
I completed internet research to understand the exit definitions.
| Comparison of Unicorn Company Exit Strategies | ||||||
|---|---|---|---|---|---|---|
| Exit Valuation in $Billions US Dollars | ||||||
| rn | Mean | Min | Q1=25% | Median | Q2=75% | Max |
| IPO | 8.58 | 1.0 | 1.70 | 3.00 | 8.00 | 72.0 |
| ACQ | 2.52 | 1.0 | 1.09 | 1.38 | 2.31 | 15.5 |
| SPAC | 3.20 | 1.1 | 1.75 | 2.60 | 4.00 | 7.0 |
IPO
An initial public offering (IPO) is the process of offering shares of a private corporation to the public in a new stock issuance. An IPO is an exit strategy for the company’s founders and early investors and allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. It also allows public investors to participate in the offering.
Acquired
A bigger company buys a start-up to gain control over it by purchasing most or all of that company’s shares or assets. If a founder is ready to sell off the business and move onto a new idea, getting acquired by another firm not only approves that the company is on a growth path in the respective industry but also bridges the financial gap that was trying to fill for quite some time. A founder can minimize the chances of failure.
SPAC merger
Special purpose acquisition companies (SPACs) have become a preferred way for experienced management teams and sponsors to take companies public. This approach offers advantages over a traditional IPO, such as providing companies access to capital even when market volatility and other conditions limit liquidity. SPACs also lower transaction fees and expedite the timeline to become a public company. However, the merger of a SPAC with a target company presents several challenges, including having to meet an accelerated public company readiness timeline as well as complex accounting and financial reporting and registration requirements. The target company’s management team will need to focus on being ready to operate as a public company within three to five months of signing a letter of intent.
Scatter Plots to Find Relationships
Last valuation and Exit Valuation
The visual shows a positive relationship between last valuation and exit valuation. This means the two sets of values move together. Higher private values are associated with higher exit values and vice versa.
Last Valuation and Exit Valuation by Country
The United States and China have the most companies that went public as well as the most exit valuations above 25 $Billion US dollars. The remaining countries have companies that are valued under 25 $Billion when they go public. Initial Public Offerings (IPOs) are the most frequent method of exiting. IPOs exit at a higher valuations than other methods.
Variance Between Last Valuation and Exit Valuation
I was curious if studying the variance between the private value and public value could provide an indication of over valuation. However, last valuation and valuation variance does not appear to have a relationship from reviewing the scatter plot.
Public v Private Valuation Variance by Year
A positive exit valuation variance is better for founders because they are successful in realizing their investments. Companies entered the public market with a positive variance more often than with a negative variance. In 2013, Facebook’s large exit valuation and $56 billion favorable variance was a rare outlier. However, more companies like facebook have become more common from 2018-2021, including Pinduoduo, Airbnb and Coinbase.
Are There More Unicorn Start-ups Going Public?
The number of unicorn companies that went public has increased significantly.
Which Exit Strategy Is More Advantagous for Founders?
The largest companies as well as the companies that grew the most in value were initial public offerings (IPOs). If maximizing exit value is the goal, then IPO is associated with the highest exit valuations. The histogram compares Aquired, IPOs and SPAC mergers. While many companies exited via acquisition, IPOs exited at higher exit values.
Box Plot to Understand Distribution of Exit Valuation by Exit Reason
A review of the distribution of exit valuation by exit strategy shows that IPOs have more outliers than acquisitions and SPAC mergers. SPCA mergers and acquisitions have public valuations that are closer to their last private valuation.
Negative variances were not that common. A negative valuation variance means that a company’s value declined when it went public compared to when it was private. The take away is that all three exit strategies appear advantageous for founders.
Is Exit Valuation and Last Private Valuation Correlated?
Box Plot to Understand Distribution of Exit Valuation by Exit Reason
Last value as a private start up and exit values are correlated. The R score of 86% confirms a statistical relationship.
When I compare the sample mean to the population mean, I am 99% confident that the mean exit valuation for start-ups in China and the United States are between $6 billion and $16 billion US.
T-Test to Test Relationships: Does the US create higher value companies than China?
I created two samples to run a two sample t-test.
Hypothesis
The null hypothesis is that there is no statistically significant difference in exit valuation between United States and China. If p-value is greater than confidence interval, then we accept the null. If we accept the null hypothesis, it means there is not evidence to support that one country or the other creates higher valued companies.
I assumed that the sample sets would show that companies from the United States have a higher exit valuation than companies from China, but this isn’t the case. The mean exit valuation of companies from United States sample set is 11.87 and is 14.69 for companies from China.
We’ll know if the null hypothesis is true by looking at the p-value from each t-test. If the p-value is greater than 0.05, we can accept the null hypothesis. If the p-value is less than 0.05, we can reject the null hypothesis.
Conclusion
China and the United States are the top two countries for creating $ 1 Billion ‘start-ups’ that eventually go public. The average exit valuation for companies that originate from these countries are likely to be similar. I did not find statistical evidence that one country or the other produced more valuable public companies.
Initial public offerings, acquisitions, and SPAC mergers are all advantageous exit strategies for founders. A comparison of the last private valuation to the first public evaluation uncovered that it is not common for companies to be devalued during their public offering. Out of the three, initial public offerings had the highest valuations. Initial public offerings also had many more companies valued significantly higher after they went public.
Next steps: If I were going to take this analysis further, I would complete deeper research on industries. I would also complete a T-test on the exit strategies to test the relationship that IPOs have the highest average exit valuation.