Question

3. Based on unicorn valuation knowledge, what advice would you give to users who are buying private company common shares on the Equity Zen platform?

Answer 1

Users who are buying private company common shares on Equity Zen platform should do so with certain amount of caution. The users should, before buying the private common shares on Equity Zen platform, should first completely and comprehensively understand the business model and the valuation model of the private company in which they are investing and then compare its model to any public company whose business model is similar to that private company.

The reason for this is that most of the private companies in general and unicorns in particular derive their valuation from funding rounds of large venture capital firms that invest in these startups and private companies. These venture capital firms have a large appetite for risk and hence individual investors should assess whether their investments in a private company is in sync with their risk profile and their risk appetite. Many unicorns command abnormal valuation and hence users should be circumspect when investing in private companies and should not get carried away by the surrounding euphoria. Many unicorns command abnormal valuation due to their fast growth strategy and lucrative buyout deals in which other companies buys out the startup. Thus users should use their own judgement before buying private company common shares on Equity Zen platform and ensure that their risk-return scenario matches with their risk profile and that the valuation of the private company is reasonable and not driven by irrational exuberance.