According to one successful business man, many private companies are being over valued. The co-founder of the professional networking website LinkedIn Reid Hoffman says that a large amount of private companies with valuations in excess of $1 billion are not likely to have those valuations recognized in public markets.
Currently, there are more than 140 privately held startups that have valuations of more than $1 billion. Hoffman says that less than half of these companies will actually turn out to be successful in the long run.
Hoffman said, “Valuations are much higher than when companies go public. Public markets have a lot of interdependent feedback, whereas private markets have big investors willing to do what they can to get in a deal, meaning it’s very easy to get a high valuation.”
Since investors are eager to put money into hot startups, pre-IPO valuations have skyrocketed. Because of this, companies are waiting longer periods of time before they go public so that they can collect on their inflated valuations.
This week, the startup payment processing company Square Inc. is set to go public. It will have a valuation of up to $4.2 billion, which is significantly below the $6 billion valuation that was sought by the company in its final funding round in 2014.
Hoffman’s venture firm, Greylock Partners, is becoming extremely skeptical of late-stage private financing. Companies are often seduced into accepting high valuations that include provisions that are designed to protect their investors from risk. Hoffman says that he works to prevent his portfolio companies from getting involved in such deals.
Hoffman actually serves on the board of directors for the successful room rental startup Airbnb. The company is privately held, and it was recently valued at $25.5 billion. However, Hoffman acknowledges that this value is probably heavily inflated.
He said, “I don’t worry about it. There’s a lot of headroom for what Airbnb can bring to hosts and guests around the world.”
The next time you hear about an outrageously successful startup, it might not be as good as it sounds.