BELIEVING IN UNICORNS: HOW TO VALUE UNICORN COMPANIES AND INTELLECTUAL PROPERTY WHILE ENCOURAGING CONTINUED INNOVATIONS AND PUBLIC DISCLOSURE.

CONTENTS INTRODUCTION I. DEFINING AND VALUING UNICORNS A. Defining Unicom Companies B. Unicom Valuations: The Need for Reliable Numbers 1. Loss of Time and Money 2. Company Value May Attract Employees 3. Avoiding a Potential Bubble Burst C. Unicom Valuations: Current Practices 1. Evaluating Startup Companies 2. Valuing Unicorn Companies 3. The Shortcomings of Current Unicorn Valuation Methods 4. The Unicorn Valuation Landscape II. PATENTS AS TOOLS OF VALUATION A. The Backdrop of Intangible Asset Valuation 1. Reasons to Put a Dollar Value on Intellectual Property Assets 2. Difficulties Inherent in Valuations of Any Asset 3. The Role of the Government in IP Values B. The Major IP Asset Valuation Theories III. INTELLECTUAL PROPERTY HOLDINGS OF UNICORNS A. Unicorns' Typical IP Portfolios 1. Patents 2. Other IP Assets B. Why Patents May Be Unappealing to Unicorns IV. HOW TO ENCOURAGE UNICORNS TO PATENT THEIR INNOVATIONS (AND WHY THAT MATTERS) A. Benefits to Unicorns Seeking Additional Patent Protection 1. Public Policy: Disclosure 2. Public Policy: Increased Certainty in Valuations B. How to Encourage Unicorns to Use the Patent System 1. Proposal 1: Additional Privacy 2. Proposal 2: Lower Costs CONCLUSION INTRODUCTION

It is notoriously difficult to place a value on "unicorn" companies, which are privately held companies valued at over $1 billion. (1) The difficulty lies in the fact that these companies do not legally need to disclose much information and are often highly innovative, meaning it is difficult to compare them to existing companies. Venture capitalists use various methods to try to value unicorns, but no one method is precise or universally accepted. (2) In fact, existing values are so imprecise that some studies suggest the world's leading unicorns are overvalued by more than 25%. (3)

One tool venture capitalists use for determining the value of a privately held company is to evaluate a company's intellectual property ("IP") assets, particularly the potential value of the company's patent holdings. (4) However, this is not currently a major way through which experts value unicorns, in large part because the average unicorn does not maintain a robust patent portfolio. (5) This Note proposes that venture capitalists and other experts should rely more heavily on the known value of IP assets when determining the value of an emerging unicorn. While patent valuation is a far-from-perfect science, it could add a degree of certainty to the current ambiguity surrounding unicorn values.

However, unicorn companies to date have had notoriously low patent holdings. (6) Thus, this Note also explores why unicorns typically have meager IP portfolios and considers how to encourage unicorn companies to patent their innovations. This is a worthwhile goal for two main reasons. First, if unicorns patent their allegedly valuable technology, then venture capitalists would be able to value the companies with more certainty, which would benefit lenders, from large financiers to individual investors. Second, these companies tend to be industry innovators, and the public and other inventors would benefit from unicorns disclosing their inventions and working within the framework of our country's patent system.

This Note looks at two imperfect sciences--valuating unicorns and valuing patents--and explores how they could positively affect each other. It begins with an overview of unicorns and their valuations, then turns to a similar analysis of current tools of IP and patent valuation. Next, it looks at how unicorn and patent values may inform or affect each other. Therefore, this Note looks at an old problem through a new lens: the uncertainty, inconsistency, slow pace, and policies of the patent system have always had critics, but exploring why unicorn companies--truly creatures of the 21st century--are not participating in the patent system may provide insight into how the U.S. patent system needs to adjust to provide robust protection and encourage public disclosure moving forward. This Note ends with proposing two possible types of change to the U.S. patent system--increasing privacy of patent filings or lowering upfront costs--so that patent laws can continue to serve their primary purposes of disseminating information and encouraging innovation. (7)

1. DEFINING AND VALUING UNICORNS

   This part serves as a primer on unicorn companies and looks at the difficulties in valuing a unicorn company. It explores the public policies behind the need for reliable values and provides an overview of existing evaluation techniques.

   1. Defining Unicorn Companies

      A unicorn company is a privately held startup company valued at over $1 billion. (8) Venture capitalist Aileen Lee coined the term "unicorn" in 2013 when there were thirty-nine such companies in the world. (9) Since then, a number of new unicorns have emerged, and there are over 800 unicorns the world over, as of September 2021. (10) In 2017 there were 102 new unicorns; in 2018 there were 158 new unicorns, and in 2019 there were 142 new unicorns. (11) While there were fewer new unicorns globally in 2019, the United States actually saw an increase in new unicorns within its borders, from 67 new U.S. unicorns in 2018 to 78 in 2019. (12) In July of 2021, there were over 900 unicorns worldwide, collectively valued at $3 trillion. (13) Notable current U.S.-based unicorns include Instacart, JUUL Labs, and SpaceX. (14)

      When a company goes public, it is by definition no longer a unicorn. Therefore, 800 current unicorns means many more companies than that have been, at some point, unicorns. The numbers are growing even as former unicorns have initial public offerings ("IPOs") or other "exits," such as a merger, acquisition, sale, or liquidation. (15) After most exits, a company becomes public and thus ineligible for the "unicorn" denomination. (16) Notable former U.S.-based unicorns include Uber, Facebook, Pinterest, Dropbox, Groupon, Airbnb, DoorDash, and Slack. (17) Former unicorns that went public in 2021 include Bumble (18) and Roblox. (19)

      Unicorn companies have captured the public's attention and have certainly captured investors' money. (20) Technically, there is not much difference between a company worth $999 million and one worth $1 billion. So, valuing unicorns is not much different from valuing another startup company of high potential value. However, this Note focuses on unicorns since they are few in number, unique, and modern. They are also a new phenomenon and signify growth and innovation to the public. (21) Because of these factors, the public and venture capitalists are particularly interested in unicorns, which necessitates proper valuations. (22) Further, this interest creates high expectations around these companies, which may or may not be warranted based on how they actually perform. (23)

   2. Unicorn Valuations: The Need for Reliable Numbers

      The lack of precise valuations of these massive, privately held companies is problematic for a few reasons. When unicorns are overvalued--as they often are (24)--several ripple effects follow. First, a falsely high valuation may cost investors, employees, and other players both time and money. Second, a false valuation makes stock options used to attract desirable employees much less valuable than they are held out to be. Third, systematically inflating the value of unicorns could eventually lead to a dotcom-like bubble burst. (25)

      1. Loss of Time and Money

         The first problem with a mistakenly high valuation is that it can lead to losses in money and time. While these company valuations first affect investors and venture capitalists, an attractive valuation also draws in "[j]ob hunters, investors, journalists, and others" who use the company's purported worth to make decisions about their own lives, most notably employment. (26) To see how problematic this can be, one need only look at failed unicorns, such as WeWork or Theranos.

         WeWork, a company that rents out flexible, work-from-home style work arrangements, was valued at about $47 billion when its leaders planned to take the company public through an IPO in October of 2019. (27) After the company filed mandatory Securities and Exchange Commission documents, investors and employees raised questions about the company's business model and true value. (28) The IPO fell through, and another company purchased a controlling interest in WeWork. The purchase price set the new value of WeWork at only $8 billion. (29) While that value allows WeWork to retain its unicorn status, it means that investors did not get the return they anticipated. It also means that WeWork's employees chose to work for what they thought was a massive company with huge potential, but which turned out to be a less-formidable company.

         Some former unicorns fail even more dramatically, leaving investors and employees with little to show for the time and money they poured into the companies. For instance, Theranos, purportedly a blood-testing company founded by young entrepreneur Elizabeth Holmes, was valued at about $10 billion at its peak. (30) After a 2015 newspaper article revealed that the company's technology could not do what its founder said it could, (31) Theranos began to spiral downward. By 2018, the SEC had sued Holmes, and Theranos folded completely. (32) The company owed at least $60 million to creditors at that time. (33)

         From these two examples, it is clear that a better valuation system, based on more than just hype and promises from charismatic entrepreneurs, is necessary. In the cases of WeWork, Theranos, and other unicorns that do not live up to their hype, (34) employees lose time they put into seemingly promising companies, and employees and investors lose money when the companies fold. Employees may lose their jobs, and they may have difficulty seeking employment at another large, competitive company, since the failed unicorn may not be the resume boost that they had reasonably...