Squaring Venture Capital Valuations with Reality | Gornall, Strebulaev

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.

Abstract

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.

Citation

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.

Private valuations are a fugazi | The Hustle

Private valuations are a fugazi; staff; In The Hustle; 2017-08-04.

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

Original Sources

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.

Mentioned

Scope

  • 116 unicorns
  •  founded after 1994.

Exemplars

  • AppNexus
  • Square Inc.
  • HomeAway
  • Oscar Insurance Corp.
  • Pivotal Software Inc.
  • Snap Inc.
  • SolarCity
  • Uber Technologies, Inc.

Referenced

The Dawn of the Profitable Unicorn, The Fall and Rise of Technology Juggernauts | Michael Moritz

Michael Moritz

Original Sources

Some Report, not shown; Francisco Partners, San Francisco, CA
Francisco Partners is an M&A shop.

Mentions

  • Tale of Woe
    • From 2000
    • 15 largest tech firms
    • largest capex
    • lost $1.35T in value, 60%
    • Cohort
      • Microsoft: grew
      • Nortel: $209B →$0 (bankruptcy)
      • Cisco: $433B → $144B.
  • Conundrum
    <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>
  • Why
    • 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
    • From 2000
    • 15 smallish tech firms
    • chosen with hindsight
    • $10B → $2.1T
    • Cohort (not recited clearly)
      • Alibaba (#4)
      • Baidu (#6)
      • Amazon is not included, it wasis a “retailer”
      • Apple is included
      • Facebook
      • Google
      • LinkedIn
      • Salesforce
      • Tencent (#5)
      • Twitter
      • YouTube
    • Factoids
      • 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.
  • Theme
    • novelty
    • China
    • patience
    • capital efficiency
  • Commonality
    • <quote>none of these companies sully their hands with anything as taxing as hardware.</quote>
    • software deployment
      cloud-type deployment on bespoke proprietary rigging
    • audience management
      (organizing and collating the contributions of consumers).
  • Admonishment
    • patience
      • the long-term view
      • chasing fads
      • 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>
    • capital efficiency
      • Before 2008, little capital was required for a “unicorn”
        Example

        • Google required $8M to be profitable
      • After 2008, lots of capital is required for a “unicorn”
        Claim

        • Something in the current crop of unicorns will be profitable
        • Therefore, it requires lots of capital to make a unicorn nowadays.

Are We In A Tech Bubble? | Lou Kerner

Lou Kerner; Are We In A Tech Bubble?; on Slideshare; 2015-10; 76 slides.
Lou Kerner, founder, manager, The Social Internet Fund

tl;dr → yes.

Conclusions

slide 76

  • The (public) stock market is too high
  • Tech valuations on public markets are in line with the broad market (which is too high).
  • Capital formation outpaces exits; this cannot continue.
  • Private markets are overvalued; they have unicorns (very high revenue multiples).
  • Fixed income is “de-risking.”
  • There are still opportunities in tech.

Mentions

  • All the dumb money piling in

Referenced

Is Silicon Valley in Another Bubble … and What Could Burst It? | Vanity Fair

Is Silicon Valley in Another Bubble … and What Could Burst It?; In Vanity Fair; 2015-09-01.
Teaser: With the tech industry awash in cash and 100 “unicorn” start-ups now valued at $1 billion or more, Silicon Valley can’t escape the question. Nick Bilton [opines]

tl;dr → yes. separately noted.