Startup Risk: from Dropbox to Airbnb

Sources: Morgan Stanley Investment Management, Allianz, NYU Stern School of Business

Want to know which startups are particularly risky for investors to put their money into? Calculations by institutional investors suggest that investing in coffee startup Blue Bottle or physician social network Doximity is highly risky. Less risky: Palantir and Airbnb.

These estimates of risk are based on an arcane financial term called weighted average cost of capital. That’s an estimate of how big an annual return on investment investors need in a company to make up the risk they’re taking by putting money into the company. If the return isn’t possible, the investors should put their money elsewhere.

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In related disclosures as part of the same valuation methodology, Morgan Stanley funds and others also estimated each company’s perpetual growth rate–the annual percentage growth of company cash flows after a certain undisclosed point in the future. Mode Media came in lowest at 2.5%–not much higher than inflation rate projections–while Flipkart and Legend Pictures were projected to be highest, at 4%.

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Investors expect higher returns for putting their money into companies deemed to be riskier.