The chasm between public and private valuations of ‘Unicorns’(bloomberg.com)
bloomberg.com
The chasm between public and private valuations of ‘Unicorns’
https://www.bloomberg.com/news/articles/2017-08-02/the-magic-behind-many-unicorn-startups-complex-stock-contracts
44 comments
The Paul Foot award is given annually to journalists who get right things of significant nuance.
Just getting on the shortlist for a year is a significant achievement.
http://www.private-eye.co.uk/paul-foot-award/all
Just getting on the shortlist for a year is a significant achievement.
http://www.private-eye.co.uk/paul-foot-award/all
Legal journalism is surprisingly good. "Waymo filed a brief saying...; Uber denied..." I think it's because there is no pretense of reaching an objective conclusion. In other kinds of journalism, reporters typically will take peoples' one sided accounts and present them as facts, obfuscating that state of affairs in the name of protecting sources. But in an article about a lawsuit, everyone acknowledges that the filings are each party's one-sided account.
Noam Chomsky used to talk about how there are markets for good journalism. Economic journalism for people on wall street. Academic journalism for academics. These journalists are usually high quality, because they have to be, their audience understands the topic material and will make economic and career bets based on the text. By contrast, many types of mass reporting (economic reporting for the masses) has no such constraint, and hence becomes subject to whoever the highest bidder's spin/story is.
I've been using longform.org Its a manually curated list by a group that cares about the art of journalism, and highlights the best pieces of longform journalism in the press on a feed.
I've found the accuracy of the pieces to be far higher than most other sources. I'm guessing a lot of that has to do with the fact that in order for a journalist to write a 20 page report on a topic, they have to research it a whole lot better than writing another 2 paragraph summary for some online editorial. That, and only the better publishers tend to be able to afford such research, and they tend to have higher standards.
I've found the accuracy of the pieces to be far higher than most other sources. I'm guessing a lot of that has to do with the fact that in order for a journalist to write a 20 page report on a topic, they have to research it a whole lot better than writing another 2 paragraph summary for some online editorial. That, and only the better publishers tend to be able to afford such research, and they tend to have higher standards.
The worst of tech journalism is almost always content which is novel only to a total outsider. It's like journalists say "ok, a short investigative piece should take me 5 hours of research", and then apply that 5 hours to both deep dives on topics they know well, and basic reading on topics they don't know at all.
Longform.org is a favorite of mine because it sidesteps that problem. I basically never encounter a piece that makes me think "I knew all of that already, and more accurately". Journalism that could be created by reading Wikipedia and synthesizing is often wretched, and the sheer need to fill pages prevents that.
Longform.org is a favorite of mine because it sidesteps that problem. I basically never encounter a piece that makes me think "I knew all of that already, and more accurately". Journalism that could be created by reading Wikipedia and synthesizing is often wretched, and the sheer need to fill pages prevents that.
The measuring stick for journalists being right is whether their content brings eyeballs to ads. That journalists are paid to be accurate is just another aspect to the fiction this article talks about.
I wish everyone treated all news so skeptically. Software people know that the tech news is laughably bad. Finance people know that financial news is garbage. And so forth. But most people then fail to extend that same skepticism of the media to areas outside of their expertise. Michael Crichton put it well:
“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray's case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the "wet streets cause rain" stories. Paper's full of them. In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”
“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray's case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the "wet streets cause rain" stories. Paper's full of them. In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”
This is my all-time favorite insight about journalism.
When I think about the gross incompetence of the average piece on e.g. encryption, it's good to remember that I shouldn't assume anything else is better unless I have a specific reason to think so.
It's also motivated me to start checking primary sources really aggressively. I may not know enough to do detailed analysis on court rulings, sociology papers, and the like, but I can at least cross-check basic statements of fact with the source. And shockingly often, they're just not true. The coverage of e.g. Trump's travel ban was often totally detached from reality - not even in politicized ways, but via simple "never even read the source" foolishness.
It's depressing to realize how much journalism isn't at all value-added over a zero-commentary list of facts or quotations.
When I think about the gross incompetence of the average piece on e.g. encryption, it's good to remember that I shouldn't assume anything else is better unless I have a specific reason to think so.
It's also motivated me to start checking primary sources really aggressively. I may not know enough to do detailed analysis on court rulings, sociology papers, and the like, but I can at least cross-check basic statements of fact with the source. And shockingly often, they're just not true. The coverage of e.g. Trump's travel ban was often totally detached from reality - not even in politicized ways, but via simple "never even read the source" foolishness.
It's depressing to realize how much journalism isn't at all value-added over a zero-commentary list of facts or quotations.
I think the reality of most tech journalism is that the journalist is being paid per-article, and not particularly well at that. The time required to adequately fact-check and get the details right would mean lower output and, thus, lower income.
We need a yelp for journalists.
I think journalists should submit themselves to the same kind of public scrutiny as politicians. People like Don Lemon, Chris Cuomo, Sean Hannity, Wolf Blitzer, and Tucker Carlson should be getting grilled by other journalists and defending their decisions in press conferences, just like they expect politicians to. They're actually more politically powerful than most elected officials.
Here is a transcript of Tucker Carlson being questioned by Glenn Greenwald of The Intercept: https://theintercept.com/2017/07/26/intercepted-podcast/
This discussion is a case-study on how to respectfully disagree.
(search for where Tucker Carlson says "Thanks, Glenn." in the transcript. Probably better to listen so it is clearer which text is actually exerpts from Carlson's show and which text is the actual interview)
This discussion is a case-study on how to respectfully disagree.
(search for where Tucker Carlson says "Thanks, Glenn." in the transcript. Probably better to listen so it is clearer which text is actually exerpts from Carlson's show and which text is the actual interview)
Those 4 people you mentioned are political commentators not journalists- in a sense you are correct that they are sort of like politicians but they represent only their viewers/haters and don't vote on policy.
You're right. But they're the public face of whoever actually makes decisions about what is covered, how much it's covered, and how it's framed. Look at the front page of Fox or CNN: there is no real distinction between "opinion" and "news". The "news" coverage inevitably has the same framing that the commentators then run with and make explicit.
Someone should be held accountable in the court of public discourse, as we have come to expect of politicians. It seems like the commentators are the ones who, at least in the presentation of the papers and networks, most "own" the coverage, and who can be the subject of public backlash.
Someone should be held accountable in the court of public discourse, as we have come to expect of politicians. It seems like the commentators are the ones who, at least in the presentation of the papers and networks, most "own" the coverage, and who can be the subject of public backlash.
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for science reporting, pretty much everything by Quanta Magazine is good.
the financial times has a reputation for not being awful because you can't trade on bullshit, but who knows? I can't actually evaluate.
the financial times has a reputation for not being awful because you can't trade on bullshit, but who knows? I can't actually evaluate.
I think it's mostly the journalists who are getting fooled.. which is ironic because they're the ones telling us not to get fooled...
The journalists are the ones that are trying to get us fooled sometimes
Why? What is their motivation? I don’t know what’s in it for them unless they are invested in the company about which they are reporting, which would be unethical unless they disclosed it.
they get information and interviews with senior members of the management if they are positive about the company, which makes their article more unique and gets them more clicks
Advertisers don't want unconvincing journos.
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You pick the Valuation, I set the Terms…
https://medium.com/@Alexoppenheimer/you-pick-the-valuation-i...
https://medium.com/@Alexoppenheimer/you-pick-the-valuation-i...
I found this section astonishing:
> But not every startup is grossly overvalued. For example, researchers found Uber Technologies Inc. has only one instance of a liquidation preference. The study said Uber’s valuation of $69 billion is only 12 percent higher than the fair value approximation. Even at the lower estimate, Uber would still be the world’s most valuable tech startup.
That definitely will incentivize the current investors to make sure Uber survives. Didn't realize this.
It's also astonishing, because hitting that valuation didn't they essentially take a lot of the "investment" structured as loans? [1][2]
[1] https://www.theverge.com/2016/6/14/11936316/uber-leveraged-l...
[2] https://www.wallstreetoasis.com/forums/uber-last-35b-raise-d...
> But not every startup is grossly overvalued. For example, researchers found Uber Technologies Inc. has only one instance of a liquidation preference. The study said Uber’s valuation of $69 billion is only 12 percent higher than the fair value approximation. Even at the lower estimate, Uber would still be the world’s most valuable tech startup.
That definitely will incentivize the current investors to make sure Uber survives. Didn't realize this.
It's also astonishing, because hitting that valuation didn't they essentially take a lot of the "investment" structured as loans? [1][2]
[1] https://www.theverge.com/2016/6/14/11936316/uber-leveraged-l...
[2] https://www.wallstreetoasis.com/forums/uber-last-35b-raise-d...
Aren't all private market valuations fiction? I don't think investors in private placements are wrong on trend (they're smarter than I am and spend all day tracking this stuff) but as far as actual numbers, I don't believe them.
Public market valuations are a bit fictitious as well, but at least your holdings in those companies are:
Public market valuations are a bit fictitious as well, but at least your holdings in those companies are:
* regulated to the point you can compare across companies
* forced to be truthful by law
* liquid so you can move in and out of positions at willAs linked elsewhere in this thread: https://medium.com/@Alexoppenheimer/you-pick-the-valuation-i...
Private valuations combine "assessing value" with "striking a deal". I don't think it makes much sense to treat them as real numbers when it's possible for people to say things like "we don't want a down round later, value us at 20% less than that".
Private valuations combine "assessing value" with "striking a deal". I don't think it makes much sense to treat them as real numbers when it's possible for people to say things like "we don't want a down round later, value us at 20% less than that".
> The study found that it can exaggerate a company’s valuation by as much as 94 percent.
Whilst it may be technically true, it's not useful to employees granted common shares. You might naively think you should haircut the value of your stock by 50% to get a fair valuation. But that's not true. Depending on the exit/IPO valuation, a liquidation preference could reduce the amount paid to common shareholders by anything from zero to 100% (i.e. infinite overvaluation of common equity).
> The study said Uber’s valuation of $69 billion is only 12 percent higher than the fair value approximation.
Yes, if a company's valuation goes up significantly between rounds, then the liquidation preferences (which are a form of downside protection) will have less (or perhaps) zero effect.
Whilst it may be technically true, it's not useful to employees granted common shares. You might naively think you should haircut the value of your stock by 50% to get a fair valuation. But that's not true. Depending on the exit/IPO valuation, a liquidation preference could reduce the amount paid to common shareholders by anything from zero to 100% (i.e. infinite overvaluation of common equity).
> The study said Uber’s valuation of $69 billion is only 12 percent higher than the fair value approximation.
Yes, if a company's valuation goes up significantly between rounds, then the liquidation preferences (which are a form of downside protection) will have less (or perhaps) zero effect.
I find this really enlightening when all I've ever heard about from the under 30 generation was how they were going to "do thing different" and always apply social conscience.
The study found that it can exaggerate a company’s valuation by as much as 94 percent.
Ratchets can inflate a startup’s value by 56 percent or more, the study said.
etc.
Many if not all of these "techniques" sure sound old school to me.
The study found that it can exaggerate a company’s valuation by as much as 94 percent.
Ratchets can inflate a startup’s value by 56 percent or more, the study said.
etc.
Many if not all of these "techniques" sure sound old school to me.
Most of the VCs and probably the majority of founders involved is above 30, I would think.
I'm surprised to see them framing a liquidation preference as an unusual provision. Don't almost all venture deals include a 1x liquidation preference? Seems like a reasonable protection for an investor putting money into a company with no revenue or assets.
1X is normal. 3X is nutzo.
Tl;dr on this article is that a private valuation is more than a number. The whole picture must be considered. A high valuation with onerous terms might be "lower" than a lower valuation with reasonable or especially favorable terms.
One thing I don't get is: isn't a lower valuation on good terms better for founders? Why are founders playing the unicorn game at all?
Tl;dr on this article is that a private valuation is more than a number. The whole picture must be considered. A high valuation with onerous terms might be "lower" than a lower valuation with reasonable or especially favorable terms.
One thing I don't get is: isn't a lower valuation on good terms better for founders? Why are founders playing the unicorn game at all?
Well, for starters, there's the image part of it: the higher the top-line number, the more prestige comes with that.
Then there's the potential that the founder has taken money off the table (giving up on-paper money for cash), so even if the deal isn't quite as nice as it could be, they still own a significant portion of a "successful" company.
Also, the higher the top-line valuation, the more free marketing you get (the headlines read the same, just with a bigger number in it). This can translate into an easier time of hiring, and the ability to hand out smaller and smaller slices of equity for that top talent (employees generally will never see the term sheets to understand that even their 0.01% of the company is likely to be worth very little).
Obviously some founders will optimize for the former (lower valuation for better terms); others will be more interested in ratcheting up that top-line number to attract future investors, high-value employees, book deals, press, etc. That's ultimately the founder's prerogative.
Then there's the potential that the founder has taken money off the table (giving up on-paper money for cash), so even if the deal isn't quite as nice as it could be, they still own a significant portion of a "successful" company.
Also, the higher the top-line valuation, the more free marketing you get (the headlines read the same, just with a bigger number in it). This can translate into an easier time of hiring, and the ability to hand out smaller and smaller slices of equity for that top talent (employees generally will never see the term sheets to understand that even their 0.01% of the company is likely to be worth very little).
Obviously some founders will optimize for the former (lower valuation for better terms); others will be more interested in ratcheting up that top-line number to attract future investors, high-value employees, book deals, press, etc. That's ultimately the founder's prerogative.
A lot of the preferred equity terms really make them much more like bonds than common stock. Quick quiz, what's the difference between a zero-coupon convertible bond and preferred stock with a 3x liquidation preference?
This seems inevitable when the goal of an IPO is to cash out early investors rather than raise capital.
We can label it with all sorts of names but at the base level it's just old-fashioned corruption. Favors for favors and I-scratch-your-back kind of stuff.
No, we can call it the result of negotiation between companies and investors. It's not at all uncommon for investors to use a liquidation preference as a negotiating point to counter founders' demands for a higher valuation.
That's the point of the article! What do those negotiations do?
>The tools used to negotiate a higher share price with investors often come at the expense of employees and early shareholders, sometimes drastically reducing the actual value of their stock.
Come on, it's corruption. It's people at the top playing numbers games so they can make a lot of money while basically defauding all the people at the bottom who should also stand to make a lot of money.
>The tools used to negotiate a higher share price with investors often come at the expense of employees and early shareholders, sometimes drastically reducing the actual value of their stock.
Come on, it's corruption. It's people at the top playing numbers games so they can make a lot of money while basically defauding all the people at the bottom who should also stand to make a lot of money.
The negotiations allow founders and investors to arrive at an agreeable set of terms by which investors put money into the business.
You have a very strange view of venture capital.
You have a very strange view of venture capital.
>The negotiations allow founders and investors to arrive at an agreeable set of terms by which investors put money into the business.
You're ignoring everybody who's not a founder or investor. There are people with stakes in this process who aren't founders or investors who are important too you know.
>You have a very strange view of venture capital.
In today's climate I definitely do.
You're ignoring everybody who's not a founder or investor. There are people with stakes in this process who aren't founders or investors who are important too you know.
>You have a very strange view of venture capital.
In today's climate I definitely do.
> You're ignoring everybody who's not a founder or investor. There are people with stakes in this process who aren't founders or investors who are important too you know.
You mean the employees? Sucks to be them.
You mean the employees? Sucks to be them.
Why does it suck to be them? If all goes well their options will be worth something. If it doesn't they'll have no value - that's how equity works. If you want guaranteed, predictable outcomes, negotiate for a higher salary in lieu of equity or go work for a company that isn't on the VC rocket ship.
The founders are also taking a huge risk by taking on a liquidation preference >1x... if everything doesn't go well they could be completely wiped out or substantially diluted, as was the case with Blue Apron.
The founders are also taking a huge risk by taking on a liquidation preference >1x... if everything doesn't go well they could be completely wiped out or substantially diluted, as was the case with Blue Apron.
'agreeable set of terms' that is to the detriment of small shareholders.
Come to think of it, is there anything of significant nuance that journalists do get right?