It’s a common misperception that the Prime Unicorn Index (Index) goes up but never goes down. The truth is that the Index can easily go down.
In aggregate, the Prime Unicorn Index has not gone down over the last five years – but then again, neither has the overall stock market.
The reason it has not receded is threefold:
- The general economy during this timeframe can best be described as pro-business
- There have been unprecedented inflows of capital from the venture capital community
- The onerous regulatory environment for public companies serves as a disincentive for companies to go public, which causes their valuations to build.
As we know, however, the public market is cyclical. The same is true of the private market – a correction eventually will come. But won’t private companies in the Prime Unicorn Index block any correction because of their reluctance to embrace a down round? Cynics might say that private companies will do everything in their power to avoid engaging in a down round, which would dampen their valuation and the wealth of their shareholders.
However, it is important to note that our valuation methods are far more sophisticated than just basing valuation on the price paid for a perception of a company — we take into consideration a host of additional factors. For example, we examine Incentive Plan share pricing (409A) and other documents that must be filed in accordance with the law that is also reflective of the true value of a company. Over the last decade, we’ve gone to great lengths to build relationships that give us access to these documents and allow us to stay true to our methodology.
The bottom line is that the Prime Unicorn Index can go down just as easily as the Dow Jones Industrial Average can go down.
Here are five recent examples:
- The Honest Company. The company had a Series D primary investment in August of 2015 at $45.76 per share. Following Series D investment, the company made multiple adjustments to its internal pricing for its incentive plan. Based on our methodology for the Prime Unicorn Index, the downward adjustments to the internal pricing of the incentive shares discounted the original price per share from $45.76 to $45.33 in May of 2016, followed by additional downward adjustments to $34.26 in August of 2017 and $16.47 in September of 2017. The Honest Company raised a Series E round in September 2017 at $19.6048 per share.
- Adroll. The company’s most recent primary investment was a Series D round in 2014 at $11.517 per share (adjusted from $23.034 per share for a 1-to-2 split in 2015). Following the 2014 Series D round, Adroll made adjustments to its internal pricing for its incentive plan. Based on our methodology, the downward adjustments to the internal pricing of the incentive shares discounted the original preferred price per share from $11.517 to $10.97 in July of 2016 and again down to $7.48 in October of 2018.
- Dropbox. The company’s most recent primary investment was a Series C round in April of 2014 at $28.65 per share. Following the Series C investment, Dropbox made multiple adjustments to its internal pricing for the company’s incentive plan. Based on our methodology for the index, the downward adjustments to the internal pricing of the incentive shares discounted the original price per share from $28.65 per share to $24.64 per share in January of 2016 and then to $21.07 per share in July 2017. Dropbox priced its IPO in March of 2018 at $21 per share.
- Twist Bioscience. The company’s most recent primary investment was an extension of their Series D round in 2018 at $21.24 per share (adjusted from $2.1457 per share for a reverse split in October of 2018). Twist Bioscience priced its IPO at $14 per share on October of 2018.
- Human Longevity. The company authorized and issued a ~$200M Series B preferred round in Feb 2017 @ $12.78 per share. On 12/4/2018 the company filed a new Amended and Restated COI authorizing ~$25M of a “new” Series C Preferred stock @ $2.26 per share.
Failing to accept that the Prime Unicorn Index can go down could lead to a costly mistake one day.