Will Gornall, Ilya A. Strebulaev. Squaring Venture Capital Valuations with Reality (2017-07-11; 2017-04-22 → 2017-07-16). Stanford University Graduate School of Business Research Paper No. 17-29. ssrn:2955455; Abstract ssrn:2968003. 54 pages.
tl;dr → <quote>recently issued shares almost always have better cash flow rights than the previously issued shares</quote> as anyone in the business for more than one series-cycle will be able to tell you.. The valuations claimed out to the Muggles are inflated, by (average) 49%-59% and upwards unto 100% and beyond.
We develop a financial model to estimate the fair value of venture capital-backed companies and of each type of security these companies issue. Our model uses the most recent financing round price and the terms of that financing to infer the value of each of their shares. Using data from legal filings, we show that the average highly-valued venture capital-backed company reports a valuation 49% above its fair value, with common shares overvalued by 59%. In our sample of unicorns – companies with reported valuation above $1 billion – almost one half (53 out of 116) lose their unicorn status when their valuation is recalculated and 11 companies are overvalued by more than 100%. Overvaluation arises because the reported valuations assume all of a company’s shares have the same price as the most recently issued shares. In practice, these most recently issued shares almost always have better cash flow rights than the previously issued shares, so equating their prices significantly inflates valuations. Specifically, we find 53% of unicorns have given their most recent investors either a return guarantees in IPO (14%), the ability to block IPOs that do not return most of their investment (20%), seniority over all other investors (31%), or other important terms.
Gornall, Will and Strebulaev, Ilya A., Squaring Venture Capital Valuations with Reality (July 11, 2017). Stanford University Graduate School of Business Research Paper No. 17-29. Available at SSRN: ssrn:2955455.
tl;dr → reporter learns about how capitalization tables work, how liquidity preferences work, how warrants work, how finance works. Cites Bloomberg & NYT and ultimately Gornall & Strebulaev
Will Gornall, Ilya A. Strebulaev. Squaring Venture Capital Valuations with Reality (2017-07-11). Stanford University Graduate School of Business Research Paper No. 17-29. ssrn:2955455; Abstract ssrn:2968003. Separately filled.
founded after 1994.
Oscar Insurance Corp.
Pivotal Software Inc.
Uber Technologies, Inc.
Here’s How Unicorns Trick You Into Thinking They’re Real; Julie Verhage; In Bloomberg; 2017-08-03.
tl;dr → cites Gornall & Strebulaev
<quote>Researchers pointed to AppNexus, a digital advertising startup. The company sold shares with a liquidation preference that guaranteed new backers at least double the amount they put in if AppNexus is acquired.</quote>
“The Fall and Rise of Technology Juggernauts”; In The Financial Times (FT); 2015-12-03; paywall.
Some Report, not shown; Francisco Partners, San Francisco, CA
Francisco Partners is an M&A shop.
Tale of Woe
15 largest tech firms
lost $1.35T in value, 60%
Nortel: $209B →$0 (bankruptcy)
Cisco: $433B → $144B.
<quote>One extraordinary aspect of this meltdown is that it did not occur, as some might suspect, in the much ballyhooed dotcom wonder companies of yesteryear. Instead it was a blight that affected most of what were once considered blue-chip technology holdings.</quote>
Decline in the cost of computing (systems, hardware, semiconductors)
Open source software
Rental computers; “clouds” of computers
Proprietary designs: Amazon, Facebook, Google
Tale of Hope
15 smallish tech firms
chosen with hindsight
$10B → $2.1T
Cohort (not recited clearly)
Amazon is not included, it wasis a “retailer”
Apple is included
Alibaba+Baidu+Tencent = $409B
Amazon = $209B (but Amazon is not included, it is a retailer)
Apple = $659B ($6B→$659B)
Facebook+Google+LinkedIn+Salesforce+Twitter = $850B, aggregage age 33 years.
<quote>none of these companies sully their hands with anything as taxing as hardware.</quote>
cloud-type deployment on bespoke proprietary rigging
(organizing and collating the contributions of consumers).
the long-term view
the long arc of history
China (“The East”) has it; the U.S. (“The West”) does not.
<quote>Woe betide the management of any western technology company that underestimates the challenge posed by the vast number of emerging Chinese competitors — fueled by an ambition and work regimen that’s hard to match in Europe and the US.</quote>
Before 2008, little capital was required for a “unicorn”
Google required $8M to be profitable
After 2008, lots of capital is required for a “unicorn”
Something in the current crop of unicorns will be profitable
Therefore, it requires lots of capital to make a unicorn nowadays.