Do Investors Overvalue Startups? Evidence from the Junior Stakes of Mutual Funds
Mutual funds overvalue their junior stakes in startups by 53% compared to fair value models that account for multi-tier capital structures. Junior securities are marked close to senior securities, despite the latter being worth 58% more per share. Mutual funds overpay in secondary purchases relative to model fair values. Overvaluation is not justified by ex-post exit outcomes and does not decline over time or vary with VC boom-and-bust cycles. Mutual funds' valuation updates are more correlated with model fair values after a down round. The findings suggest mutual funds underestimate downside risks for junior securities while overweighting IPO exit scenarios.
Keywords: Startup financing, startup valuation, mutual funds, venture capital, fair value, private valuation
Dr. Ayako Yasuda, Graduate School of Management, UC Davis
Professor Ayako Yasuda is the Maurice J. and Marcia G. Gallagher Professor of Finance at the Graduate School of Management at University of California at Davis, Senior Fellow of the Asian Bureau of Finance and Economic Research (ABFER), and Fellow of the Private Equity Research Consortium. Professor Yasuda’s research focuses on venture capital; private equity; impact funds; environmental, social, and governance (ESG) issues; social entrepreneurship; and long-horizon institutional investors. She has published her research in the Journal of Finance, the Journal of Financial Economics, and The Review of Financial Studies, and her expertise on entrepreneurship, private equity, and venture capital has been cited in news publications such as The Wall Street Journal, The Economist, the Nikkei, the Financial Times, and The New York Times.
She earned a Ph.D. in Economics from Stanford in 2001, and a B.A. in Quantitative Economics (Dean’s Distinction, Phi Beta Kappa) from Stanford in 1993. Before joining the faculty of UC Davis, she was a faculty at The Wharton School of the University of Pennsylvania, and earlier in her career, she was a financial analyst at Goldman Sachs. She co-authored an acclaimed MBA textbook Venture Capital and the Finance of Innovation (now in 3rd edition). Her paper “Impact Investing” (Journal of Financial Economics 2021) won the Kellogg School of Management at Northwestern University’s Moskowitz Prize for outstanding research on sustainable and responsible investing.
Ayako Yasuda | UC Davis Graduate School of Management