Chemistry of Unicorn fuel

Private valuations are fueled by Mutual and Hedge funds, thus creating a lot of unicorns. Seems like a lot of risk to take bets at such high valuation but they have a good rationale.

Say a company is valued at 20B in the private market with the investment of 1B by one such fund. When the company goes public, it would either be a 2B company (Flipkart, Snapdeal couple of Indian examples getting weighed down) or it would continue to grow and become a 100B company (Uber and likes). With the liquidation preference, the EV of the company could be calculated with a relative probability of 99% say downside and 1% chance of 5X growth.

( 1% x 100B + 80% X 2B + 19%X0B) = 2.6B

If the chance of positive outcome improves to 5%, then the company’s value would be:

( 5% x 100B + 75% X 2B + 15%X0B) = 6.5B and so goes the math.

With liquidation preference — the downside is capped and the upside could be 5X or more. An ideal scenario for such funds. This dynamic is quite different from public markets.

But then this puts other investors in the spot and might lead of failed M&As, companies crumbling under their own weight. I would think they would still control the board. This puts the late investors at loggerheads with these funds?