The impact of platform business models on the valuations of unicorn companies

Abstract

Despite the importance of digital platforms in the global economy, there has been little systematic or quantitative analysis of how investors value platforms and the scope of their business models in private or public markets. This paper seeks to fill this gap in part by analyzing how unicorn valuations are affected by “platformness” (the degree to which a firm incorporates at least some elements of a multisided business model with the potential to generate network effects). We investigated 959 unicorns (private companies valued at $1 billion or more) existing as of December 31, 2021, to assess whether investors placed a higher value on firms in different regions of the world and operating with platform businesses rather than offering only “standalone” products or services. We found that companies with some elements of a platform business model commanded a significantly higher average valuation compared to non-platform companies. These higher average valuations also varied by location: North America 129%, Europe 68%, and Asia-Pacific (APAC) 39%. The geographical variations are likely due to greater investor interest in platform businesses in the United States as well as other characteristics more common among North American unicorn platforms. More than half of the unicorn sample and more than half of platform unicorns originated in North America. We also found that investors paid 34% more for “innovation platforms” (these enable third-party complementary innovations through application programming interfaces) versus “transaction platforms” (these bring together two market sides as in product or service marketplaces, financial exchanges, or social media and messaging websites). Platform unicorns with the potential to generate and exploit global network effects also had approximately 26% higher valuations than platforms limited to non-global network effects.