In the modern tech world, the term “unicorn” has become a badge of honor—shorthand for a startup valued at $1 billion or more. It evokes images of rapid growth, disruptive innovation, and boundless investor confidence. But what if much of this perceived value is little more than a mirage?
According to a growing number of venture capitalists (VCs) and industry analysts, more than half of these so-called unicorns may be grossly overvalued. In fact, many of them might not even be worth close to $1 billion when evaluated through traditional business lenses like revenue, profitability, market fundamentals, or exit potential.
So, what’s going on here? Are investors inflating valuations for their own benefit? Is the media complicit in hyping up stories without digging deeper? Or is this just a part of the high-risk game of startup investing?
Let’s dig into the numbers, explore why some unicorns may be overvalued, and examine what this means for the startup ecosystem.
What Is a Unicorn, Really?
The term “unicorn” was coined in 2013 by venture capitalist Aileen Lee, who wanted to describe the rarity of startups reaching $1 billion in valuation. At the time, it was an apt metaphor—there were only 39 unicorns globally.
Fast forward to 2024, and the world has seen over 1,200 unicorns, with some companies reaching valuations above $10 billion (so-called “decacorns”) or even $100 billion (“hectocorns”). This dramatic rise has sparked debates around valuation inflation and the legitimacy of unicorn status.
How Are Unicorn Valuations Determined?
Before understanding why many unicorns may be overvalued, we need to understand how startup valuations are typically calculated.
Unlike public companies, whose valuations are based on market capitalization (stock price × number of shares), private startups get their valuation from funding rounds. When a startup raises capital, a lead investor assigns a post-money valuation based on:
- The amount they invest
- The percentage of ownership they receive
- Growth projections
- Market potential
This can sometimes lead to inflated valuations because:
- Investors want to show paper gains to their LPs
- Founders want to project momentum
- Media outlets thrive on unicorn stories
A startup could be valued at $1 billion even if it has minimal revenue, high burn rates, or unclear profitability paths.
Why Do Some VCs Believe Most Unicorns Are Overvalued?
Let’s look at the primary reasons venture capitalists believe that over 50% of unicorns aren’t truly worth $1 billion:
1. Valuations Are Often Based on Preferred Shares, Not Common Equity
In funding rounds, VCs typically purchase preferred shares, which come with liquidation preferences, anti-dilution clauses, and other protective terms. These privileges mean that preferred shareholders often get their money back first in the event of an exit or IPO.
However, when calculating the company’s valuation, the media and market often use the “headline” number—a valuation that assumes all shares are equal (they aren’t). This inflates the perceived value of the company because common shares are worth much less than preferred ones.
2. Lack of Real Profits and Sustainable Business Models
A large number of unicorns have yet to become profitable, even after years of operation and billions in funding. Think WeWork, Snapchat, or Peloton—all examples of companies that attracted sky-high valuations but struggled or failed to justify them in the public markets.
A $1 billion valuation for a company burning $10 million a month with no clear path to profitability raises legitimate concerns.
3. Valuation Games and Down Rounds
To maintain the appearance of growth, startups often agree to investor-friendly terms that inflate valuations. These can include:
- Ratchets: Early investors get more equity if the company doesn’t meet future valuation targets.
- Down rounds: Companies raise money at lower valuations than previous rounds, indicating that the earlier valuation was unsustainable.
Yet, these events are often downplayed or hidden from the public eye.
4. Illiquidity Discount Ignored
Private markets are illiquid. Unlike stocks, you can’t just “sell” your shares in a startup whenever you want. This illiquidity should result in a discount on valuation, yet most unicorns are valued as if they were liquid and easily tradeable.
Case Studies of Overvalued Unicorns
1. WeWork: From $47 Billion to a Fire Sale
WeWork was once valued at $47 billion, thanks to aggressive funding rounds led by SoftBank. But after a disastrous attempt to go public and the exposure of poor governance and financials, its value plummeted to below $10 billion, and eventually, it filed for bankruptcy in 2023.
2. Juul Labs: Hype vs. Regulation
Juul once commanded a valuation of $38 billion. However, the rise in health concerns, regulatory scrutiny, and lawsuits led to an enormous drop in valuation. By 2022, it was worth less than $1 billion.
3. Theranos: A Unicorn Built on Lies
Theranos reached a valuation of $9 billion with promises to revolutionize blood testing. The company had minimal revenue and an unproven product. After criminal investigations, it was revealed that much of the technology didn’t work.
The Role of Venture Capital in Inflated Valuations
Ironically, VCs themselves contribute to the overvaluation problem. While some investors criticize the unicorn culture, others are complicit in promoting it because it serves their short-term interests.
Why Inflate Valuations?
- Attract media attention and recruit talent
- Create FOMO (Fear of Missing Out) among later investors
- Mark up their portfolios to show “growth” to Limited Partners
- Use inflated valuations to leverage secondary sales
This system creates a feedback loop, where everyone wants to believe the valuation is real—until the company goes public or fails, and reality hits.
What Happens When Overvalued Unicorns Go Public?
When unicorns reach IPO stage, they’re subjected to public scrutiny—and that’s often when the cracks start to show.
Notable IPO Flops:
- Blue Apron IPO’d at $10 per share; quickly fell below $1
- Robinhood saw a dramatic fall in value after initial investor hype
- Uber went public with a $75B valuation and has struggled to sustain profitability
These examples show that private market hype doesn’t always translate to public market success.
Are There Still “Real” Unicorns?
Yes—not all unicorns are overvalued. Some companies reach the $1 billion mark based on real fundamentals, including:
- Revenue growth
- Product-market fit
- Operational efficiency
- Clear paths to profitability or successful exits
Examples include:
- Figma – acquired by Adobe for $20 billion
- Stripe – though private, it generates billions in revenue
- Canva – profitable and widely used globally
These companies show that unicorn status can be earned, but they are the exception, not the rule.
The Consequences of Overvaluation
1. Investor Burnout
When valuations collapse, investors take massive hits, which may make them more risk-averse in the future—hurting the ecosystem.
2. Employee Disillusionment
Employees often receive stock options based on high valuations. When a company exits at a lower price, those options become worthless, leading to low morale or talent exodus.
3. Delayed IPOs or Exits
Startups stay private longer because they’re afraid of being “revalued” by the public market. This delays liquidity for early investors and employees.
4. Loss of Public Trust
Overvaluation scandals (like Theranos) reduce public trust in startups, making it harder for legitimate companies to raise capital.
What Can Be Done to Fix the Unicorn Hype?
✅ More Transparency in Private Markets
Valuations should reflect real, risk-adjusted value, not just inflated paper numbers. Sharing more financials and performance metrics can improve clarity.
✅ Media Should Focus on Fundamentals
Publications must avoid blindly celebrating unicorns without investigating revenue, burn rate, and business models.
✅ Regulation of Private Funding Disclosures
Just like public companies, late-stage startups raising large amounts should disclose more structured financial information.
✅ Better Valuation Methodologies
Instead of headline post-money valuations, we need more comprehensive models that adjust for liquidation preferences, dilution, and risk.
Final Thoughts: Chasing Real Value Over Vanity Metrics
The unicorn mythos is seductive—it promises riches, recognition, and disruption. But in many cases, these are vanity metrics that serve a narrative more than they reflect reality.
VCs are waking up to this and starting to ask harder questions. Founders must now build real businesses with sustainable models, and investors must focus less on paper valuations and more on fundamentals.
After all, being a unicorn is meaningless if the horn turns out to be made of paper.
FAQs
Q1: Why are some unicorns overvalued?
Many unicorns are overvalued due to inflated funding round valuations that don’t reflect financial fundamentals, liquidity, or profitability.
Q2: What’s the danger of overvaluation for startups?
Overvaluation can lead to down rounds, poor IPO performance, employee dissatisfaction, and long-term brand damage.
Q3: Are all unicorns fake or overhyped?
No. Some unicorns have strong business models and real revenue (e.g., Stripe, Canva). The issue lies with startups using aggressive financial engineering.
Q4: How can investors protect themselves from overhyped valuations?
By demanding transparency, avoiding FOMO investing, and conducting deep due diligence on unit economics and path to profitability.
Q5: Will the unicorn bubble burst?
It already has in some sectors. The trend is toward more disciplined investing, especially after high-profile valuation collapses in recent years.
