Why are private unicorn valuations so out of sync with public markets? Although private valuations of high-flying startups are a widely accepted measure of value on the public market, such valuations often overstate a firm’s true worth, says this Wall Street Journal video (watch, runtime: 04:34). Private investors are frequently enticed by preference shares, which provide special benefits and are more valuable than the common stock typically sold in an IPO. During evaluation, however, all stocks are valued equally, making common stock seem more valuable than it actually is and sending valuations soaring. Private companies are also not subject to the same rigorous accounting practices that public companies must use, and so are able to present investors with non-standard data that makes their finances look healthier than they actually are.

As a result, this year has seen several hotly-anticipated unicorn IPOs fall flat. IPO stock performance is currently at the worst it’s been since at least 1995, Goldman Sachs estimates, and although 2019 was initially expected to be a record year for IPOs in terms of money raised, now bankers and lawyers say this is highly unlikely to be the case.