Airtable CEO on the continued importance of getting a ‘unicorn’ valuation(techcrunch.com)
techcrunch.com
Airtable CEO on the continued importance of getting a ‘unicorn’ valuation
https://techcrunch.com/2019/02/19/airtable-ceo-howie-liu-on-the-continued-importance-of-getting-a-unicorn-valuation/
78 comments
What I find frustrating about this is if it leads a founder take liquidation preference multiples or other disadvantageous terms that drastically reduce my chance of seeing any payday as an employee. I've been around, so I'll take solid financials over juicy-looking smoke and mirrors any day, but my worry is the median startup employee is young and inexperienced enough that it probably serves the founder to play these games.
To reiterate my experience: Fought is an overstatement, but we worked hard to get 10 year options for our employees. No engineer we recruited or tried to recruit appears to have cared. They do care about valuation. That comes up all the time. This is across new and experienced engineers.
ps -- you can't blame founders for responding to the market. If potential employees overvalue unicorn valuations and undervalue 83b or long term options, well, I'm not capable of changing their minds. I sell to the market I have, not the market I wish I had.
ps -- you can't blame founders for responding to the market. If potential employees overvalue unicorn valuations and undervalue 83b or long term options, well, I'm not capable of changing their minds. I sell to the market I have, not the market I wish I had.
Unfortunately, I think that ship sails when you take VC funding. Founders that can fundraise and run corporate BD/sales well and/or are experienced can mitigate this by having a stronger hand to bargain with, but it's just unavoidably the case that VC money comes with strings attached. They indemnify themselves differently from debt investors, but as you point out, that comes from liquidation preferences as well as preferred participation and more.
While I would say that it seems probable that many startup employees are young and inexperienced enough that it services the founder to play these games, I'd definitely say that the incentives are definitely in favor of this dynamic. It's unfortunate. I'd prefer solid financials and growth, just like you. The only real way to avoid this kind of game is not to play -- have an independently wealthy founder/stakeholder, or a very close relationship with an angel investment firm that can afford to be long term. It's challenging to find that from people managing Other People's Money.
While I would say that it seems probable that many startup employees are young and inexperienced enough that it services the founder to play these games, I'd definitely say that the incentives are definitely in favor of this dynamic. It's unfortunate. I'd prefer solid financials and growth, just like you. The only real way to avoid this kind of game is not to play -- have an independently wealthy founder/stakeholder, or a very close relationship with an angel investment firm that can afford to be long term. It's challenging to find that from people managing Other People's Money.
There's a great piece of advice an experienced founder told me: the longer you wait to raise, the better off you'll be.
In my first startup we were so happy anyone would be interested in funding us we took on, in hindsight, some pretty bad terms. But having said that, our first raise got us onto a tech blog where a person reached out intrigued by what we did and turned out to be our best engineer.
It's really a calculated risk. Despite all that, since we got acquired reasonably early on, our engineers made a pretty solid return.
In my first startup we were so happy anyone would be interested in funding us we took on, in hindsight, some pretty bad terms. But having said that, our first raise got us onto a tech blog where a person reached out intrigued by what we did and turned out to be our best engineer.
It's really a calculated risk. Despite all that, since we got acquired reasonably early on, our engineers made a pretty solid return.
a company's valuation performance has always had a causal effect on business, even though academically it shouldn't.
banks found that out the hard way at the end of 2008, when companies wouldn't do business with banks with falling stock prices. even facebook found out the hard way after IPO when its stock was tanking and many tenured employees where questioning whether to stay. stock / valuation performance matters a lot.
banks found that out the hard way at the end of 2008, when companies wouldn't do business with banks with falling stock prices. even facebook found out the hard way after IPO when its stock was tanking and many tenured employees where questioning whether to stay. stock / valuation performance matters a lot.
There's so much dumb money floating around that too many "unicorn" failures are being propped up.
In the self-driving car area alone, we have:
- Cruise Automation. Showed a video of simple lane following and hyped it as self driving. Got acquired by GM for 1 billion. Claimed to have a production-ready car in 2017.[1] GM now trying to dump them.[2] Being propped up by funding from Softbank.
- Otto. Showed a video of a self-driving truck.[3] Turned out this was on an isolated road with lead and trail vehicles preventing any interference. Acquired by Uber. Valuation only 680 million, though. Used to hype Uber valuation. Self-driving technology so fake it killed a pedestrian.[4] Being propped up by funding from Softbank.
- Tesla. Showed a video of a self-driving car in 2016.[5] Turned out this was the one successful run from many tries. Full self-driving never seen again from Tesla. Softbank and Tesla discussed funding but Softbank declined.
[1] https://www.businessinsider.com.au/general-motors-cruise-pro... [2] https://www.bloomberg.com/news/articles/2018-06-15/gm-is-sai... [3] https://www.youtube.com/watch?v=Qb0Kzb3haK8 [4] https://www.economist.com/the-economist-explains/2018/05/29/... [5] https://www.theverge.com/2016/10/20/13343828/tesla-fully-aut...
In the self-driving car area alone, we have:
- Cruise Automation. Showed a video of simple lane following and hyped it as self driving. Got acquired by GM for 1 billion. Claimed to have a production-ready car in 2017.[1] GM now trying to dump them.[2] Being propped up by funding from Softbank.
- Otto. Showed a video of a self-driving truck.[3] Turned out this was on an isolated road with lead and trail vehicles preventing any interference. Acquired by Uber. Valuation only 680 million, though. Used to hype Uber valuation. Self-driving technology so fake it killed a pedestrian.[4] Being propped up by funding from Softbank.
- Tesla. Showed a video of a self-driving car in 2016.[5] Turned out this was the one successful run from many tries. Full self-driving never seen again from Tesla. Softbank and Tesla discussed funding but Softbank declined.
[1] https://www.businessinsider.com.au/general-motors-cruise-pro... [2] https://www.bloomberg.com/news/articles/2018-06-15/gm-is-sai... [3] https://www.youtube.com/watch?v=Qb0Kzb3haK8 [4] https://www.economist.com/the-economist-explains/2018/05/29/... [5] https://www.theverge.com/2016/10/20/13343828/tesla-fully-aut...
Tesla has media presence, an existing customer base and an existing distribution network. Even if they come to the party late, they're not unlikely to take a slice of the market. Therefore, if I were investing in that sector I wouldn't discount them as a meaningful contestant, remembering they can always buy their way in to third party tech.
Blackberry has media presence, and existing and very loyal customer base, and an existing distribution network...
Oh wait...that didn't work out so well for Blackberry (or Palm or Microsoft). Does anyone remember when Creative dominated the media player market? Or when everyone thought Sony would take over the electronics world? When everyone thought Yahoo needed to be broken up before it threatened the internet?
if I were investing in that sector I wouldn't discount them as a meaningful contestant, remembering they can always buy their way in to third party tech.
One thing most of Tesla's competitors all have in common is that their business interests are opposed to Tesla's business interests. This means that a licensing of self-driving tech is extremely unlikely.
Oh wait...that didn't work out so well for Blackberry (or Palm or Microsoft). Does anyone remember when Creative dominated the media player market? Or when everyone thought Sony would take over the electronics world? When everyone thought Yahoo needed to be broken up before it threatened the internet?
if I were investing in that sector I wouldn't discount them as a meaningful contestant, remembering they can always buy their way in to third party tech.
One thing most of Tesla's competitors all have in common is that their business interests are opposed to Tesla's business interests. This means that a licensing of self-driving tech is extremely unlikely.
One thing most of Tesla's competitors all have in common is that they don't have functional self driving tech either. Tesla will buy from a startup, if it buys at all. So I don't think your line of reasoning is valid.
Remember: having tech is one thing, getting it to market at scale and sorting out legal and regulatory issues, cross-border issues, distribution agreements, etc. is quite another. Tesla has done this before and thus presents a nontrivial value-add for tech holders, quite aside from "money on table now".
Remember: having tech is one thing, getting it to market at scale and sorting out legal and regulatory issues, cross-border issues, distribution agreements, etc. is quite another. Tesla has done this before and thus presents a nontrivial value-add for tech holders, quite aside from "money on table now".
Let's consider what would happen if self-driving started to really work. Take a look at Navya [1] and Local Motors [2], both of which sell electric mini-buses which can cruise around an small controlled area such as an airport parking lot or college campus. They're slow and limited, but they are actually carrying a few passengers without a driver on board.
Are those companies unicorns. No. They seem to be valued for what they actually do. Which is replace a small number of low-wage employees with expensive hardware that requires extensive support infrastructure.
Think of what it looks like if this really works. They get a few major airports signed up for "transportation as a service". Their mini-buses go between terminals, out to long-term parking, and out to rental car lots. Fine. So now, at each airport, you have to have a garage, maintenance staff, a control center, and some arrangement for dealing with problems. All the same plant as a regular bus operator, plus the high-tech part, plus it has to be close because these things can't drive some distance on regular roads to a garage or parking lot.
It's "transportation as a service", which means you have to pay for all problems. Which will happen. You'll have people cleaning off graffiti, fixing corroded sensors in winter, towing in failed vehicles, and dealing with angry riders who missed their plane. All you've saved is the cost of the drivers. So you're probably not making big money off this.
It's so much easier at the hype stage. You don't even have to perform, let alone survive on your own cash flow.
[1] https://www.youtube.com/watch?v=TAAm-wLInkE [2] http://www.buffalo.edu/ubnow/stories/2018/08/olli-debut.html
Are those companies unicorns. No. They seem to be valued for what they actually do. Which is replace a small number of low-wage employees with expensive hardware that requires extensive support infrastructure.
Think of what it looks like if this really works. They get a few major airports signed up for "transportation as a service". Their mini-buses go between terminals, out to long-term parking, and out to rental car lots. Fine. So now, at each airport, you have to have a garage, maintenance staff, a control center, and some arrangement for dealing with problems. All the same plant as a regular bus operator, plus the high-tech part, plus it has to be close because these things can't drive some distance on regular roads to a garage or parking lot.
It's "transportation as a service", which means you have to pay for all problems. Which will happen. You'll have people cleaning off graffiti, fixing corroded sensors in winter, towing in failed vehicles, and dealing with angry riders who missed their plane. All you've saved is the cost of the drivers. So you're probably not making big money off this.
It's so much easier at the hype stage. You don't even have to perform, let alone survive on your own cash flow.
[1] https://www.youtube.com/watch?v=TAAm-wLInkE [2] http://www.buffalo.edu/ubnow/stories/2018/08/olli-debut.html
While I don’t think self driving cars have much of a near term future, I do think this technology can be applied to infrasucture with dedicated right of way like Bus Rapid Transit (BRT) to greatly improve headways. Sure transit operators might have the same level of staffing, but now they can run much more frequent service. And that more frequent service means more ridership and fare revenue that can go to offsetting the technology cost.
BRT will never be a major factor regardless of whether humans or computers drive the buses. Urban areas lack the space for building new dedicated bus lanes. And outside of a few limited areas like New York City and San Francisco, most voters are also motorists who are unwilling to sacrifice their existing car lanes.
So my first reaction was that this is just a vanity metric.
However, in the public cash equity markets there is an actual benefit to having a "large" market cap.
note: Here I'll use market cap for public companies and valuation for private companies as measuring roughly the same thing even though they have some differences.
One of the greatest tail winds a stock can have is to be in a popular index, this means that ETF's will be a forced buyer of their stock.
Most indexes have a market cap component and the amount of money tracking large cap indexs dwarfs the amount in small cap indexs so a larger valuation is obviously useful.
It can also help public companies borrow as debt to equity is a ratio that most people consider when choosing to loan( buy bonds) from a company so again market cap matters.
It also helps a public company pay its employee's in restricted shares as these can be cashed out immediately by employees for actual money as the shares come off restriction so again a growing market cap has the benefit of giving employee's raises without any money leaving the company.
Microsoft used this better than anyone during the 80's and 90's.
It's less clear to me why a valuation of over $1B matters to a private company though.
Even stock options don't really seem to matter as a reason for wanting a larger valuation as typically employee's can't immediately convert options to cash. In that case only the IPO price(hence public valuation would matter).
Is there any reason other than signalling that this company belongs with the likes of Uber and Airbnb?
EDIT agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.
However, in the public cash equity markets there is an actual benefit to having a "large" market cap.
note: Here I'll use market cap for public companies and valuation for private companies as measuring roughly the same thing even though they have some differences.
One of the greatest tail winds a stock can have is to be in a popular index, this means that ETF's will be a forced buyer of their stock.
Most indexes have a market cap component and the amount of money tracking large cap indexs dwarfs the amount in small cap indexs so a larger valuation is obviously useful.
It can also help public companies borrow as debt to equity is a ratio that most people consider when choosing to loan( buy bonds) from a company so again market cap matters.
It also helps a public company pay its employee's in restricted shares as these can be cashed out immediately by employees for actual money as the shares come off restriction so again a growing market cap has the benefit of giving employee's raises without any money leaving the company.
Microsoft used this better than anyone during the 80's and 90's.
It's less clear to me why a valuation of over $1B matters to a private company though.
Even stock options don't really seem to matter as a reason for wanting a larger valuation as typically employee's can't immediately convert options to cash. In that case only the IPO price(hence public valuation would matter).
Is there any reason other than signalling that this company belongs with the likes of Uber and Airbnb?
EDIT agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.
I agree with all the key points you have listed, I just wanted to add that a unicorn became a status symbol that can impact a variety of things:
* A supplier to the unicorn may perceive the company as a future star, which makes them decide to provide goods & services at a discounted price with the intention of having their business for multiple years with potential for new business areas
* A future employee can perceive the company as "the next big thing" and decide to work there in part, because of their status symbol
* The medium-large investors may mentally perceive the company as a 'sure bet'.
* Small investors may perceive the company as "one of the ones that the big investment guns have approved off"
* Future & current customers may perceive them as a successful company
* The 'unicorn' name is catchy, increasing the brand value
All in all, 'unicorns' is just a measurement stick. In theory a $990M can be just as successful as the $1B in the medium-long run, however, the perceived view from humans (yes, all of us), can have a material impact on the business
* A supplier to the unicorn may perceive the company as a future star, which makes them decide to provide goods & services at a discounted price with the intention of having their business for multiple years with potential for new business areas
* A future employee can perceive the company as "the next big thing" and decide to work there in part, because of their status symbol
* The medium-large investors may mentally perceive the company as a 'sure bet'.
* Small investors may perceive the company as "one of the ones that the big investment guns have approved off"
* Future & current customers may perceive them as a successful company
* The 'unicorn' name is catchy, increasing the brand value
All in all, 'unicorns' is just a measurement stick. In theory a $990M can be just as successful as the $1B in the medium-long run, however, the perceived view from humans (yes, all of us), can have a material impact on the business
> In theory a $990M can be just as successful as the $1B
I'm willing to bet there are gaps in valuation distributions such that a $1B valuation is statistically more likely than a $900M valuation. I think by the time the valuation is that high you might as well throw in an extra ~10% valuation to get yourself the extra marketing of investing in a unicorn.
I'm willing to bet there are gaps in valuation distributions such that a $1B valuation is statistically more likely than a $900M valuation. I think by the time the valuation is that high you might as well throw in an extra ~10% valuation to get yourself the extra marketing of investing in a unicorn.
Great points, I think I agree on all of them. Cynically speaking, I think the answer is just that it's a round psychological number -- the three comma club. It's a rough binary signal that indicates growth and clout to a layman, and works reasonably well as a proxy therein, even if it's pretty noisy. I've personally noticed that working at unicorn companies has done a lot more for my career and network than non-unicorn companies, and it's done the same for lots of folks I worked with there, even those who weren't on as high profile projects as me and who felt like they didn't grow as much.
>the three comma club
Is that a thing people actually say and not just from the TV show? Not being facetious to you, it just makes me laugh to hear/read this term :)
Is that a thing people actually say and not just from the TV show? Not being facetious to you, it just makes me laugh to hear/read this term :)
Yes, unfortunately. It would make me laugh if it didn't make me cringe.
> It's less clear to me why a valuation of over $1B matters to a private company though.
> hence public valuation would matter
There is your answer. IPO valuations have to come from somewhere, and the most recent private valuation is usually a good starting point for what investors will pay.
> hence public valuation would matter
There is your answer. IPO valuations have to come from somewhere, and the most recent private valuation is usually a good starting point for what investors will pay.
I'm reasonably certain that the starting point for public valuations is not the most recent private valuations. These deals are typically centered around public valuation comps (i.e. other similar companies) based off of revenues/EBITDA/etc.
Couldn't the valuation be based around both most recent private valuation, and comparatively <usefulAdjective> public companies? The bankers basically just make it up, anyway. Their goal is to just pick a number as close to what they think the market will settle on as possible. The "market" includes previous investors in the company, and also public investors of similar companies. So it makes sense the bankers would consider both markets when pricing the stock.
If you sell a car, you set the price by considering how much you paid for it and how much people are paying for similar cars. End of bad analogy.
If you sell a car, you set the price by considering how much you paid for it and how much people are paying for similar cars. End of bad analogy.
People are more likely to work for a unicorn because then they can put that on their resume. It also means the startup probably won't fold anytime soon, because too many people have a stake in its success at that valuation.
> agree with the child posters but they don't really answer the question of why $1B is important for the valuation in a way that, say, $990M would not be.
Brand value / free marketing. Hitting the 1B threshold unlocks a lot of publicity that 990 million doesn’t. The buzz that it generates aids both sales and recruiting efforts.
Brand value / free marketing. Hitting the 1B threshold unlocks a lot of publicity that 990 million doesn’t. The buzz that it generates aids both sales and recruiting efforts.
chatmasta already mentioned IPOs, so I'll just add that private companies can also often be acquisition targets.
Anything that helps anchor the price for a bid is helpful, so you'll always want to point to a number that's as high as possible. You will also want to call out which series of funding that number comes from, and hopefully those two things go hand in hand.
Anything that helps anchor the price for a bid is helpful, so you'll always want to point to a number that's as high as possible. You will also want to call out which series of funding that number comes from, and hopefully those two things go hand in hand.
Honest question: is the unicorn valuation just a tool for VCs to inflate the value of their stock in the second market?
Here's a scenario that happened recently. Investors X and Y invested a $30 million Series A in UnicornCompany. Lets just say its a $200m valuation.
Those same exact investors invested a $50m Series C at a $2 billion unicorn valuation (no new investors).
Doesn't that mean their initial investment is now worth 10x in the open market? Thus making their return at least $300m on $80m invested?
Here's a scenario that happened recently. Investors X and Y invested a $30 million Series A in UnicornCompany. Lets just say its a $200m valuation.
Those same exact investors invested a $50m Series C at a $2 billion unicorn valuation (no new investors).
Doesn't that mean their initial investment is now worth 10x in the open market? Thus making their return at least $300m on $80m invested?
Yes, but they actually have to sell their shares for $x billion if they want to see any actual profit. Future investors are likely to be skeptical if the current and projected income doesn't match the valuation.
It's more complicated than that. What a company actually trades for in the open market is down to investors opinions and may be different from 'what the company is worth', which is also a little in the eye of the beholder.
However after the C the VCs may be able to report a 10x return to their investors.
However after the C the VCs may be able to report a 10x return to their investors.
No. You are conflating "valuation" with "value". Let me give you an example.
My company has 10 shares total and I manage to get you to buy one of them for $100. The logical conclusion is that the shares are worth $100 each and the company is worth $1000. You hold 1 share, and I hold 9 shares. I also have the $100 you gave me. So one can say that you bought 10% of the company at a $1000 valuation.
But let's say I don't do anything at all with the money you gave me and I had no other money to begin with. What that means is that you have 1 share and I have 9 shares and $100. If we liquidated the company now, you would get $10 back and I would keep $90. The company has a value of $100.
Now let's say that somebody is really interested in buying shares. I give you the OK to sell your share and somebody offers to buy it for $10,000. You sell your share for $10,000 (10% of the company). The logical conclusion is that the other 9 shares are worth $90,000 and the whole company has a valuation of $100,000. But I still only have $100 in the bank :-)
Now, let's say that encouraged by the huge profit you made, you buy 4 shares at $20,000 each from me. The valuation of the company is logically $200K because there are 10 shares and the last time someone bought some it was for $20K each. You own 40% of the company. I own %50 of the company and they person who bought the original share from you owns %10 of the company. The company has $80,100 in the bank. You try to sell your 4 shares now, but nobody wants to buy. The shares have a nominal value of $8,010 each ($80,100 / 10 shares), but nobody feels like buying. Your shares are worth 0 because I control the company and don't want to liquidate. Basically, I conned you into giving me $80,100 :-)
Shares are worth what other people are willing to pay for them. Whether or not someone will be willing to buy your shares back for the current "valuation" of the company depends a lot on the circumstances. Whether you are even able to sell your shares depends on agreements you made, etc, etc. You can easily have a company with a $1 billion valuation whose stock is worth less than toilet paper in reality.
Companies that are pre-IPO are really ripe for the hype machine. You generally can't trade their stock except at a "liquidation event". You can invest in them, and their valuation might climb, but you can actually realise any of that profit. If they pull a Theranos on you, then you lose all of that money. Once a company has IPOed, the stock is traded freely on the stock market. Since it is liquid, you are more likely to be able to sell your stock close to its current valuation. Keep in mind that this is still not the same as value -- stocks usually trade a prices of multiples of the current value (because people believe the companies will increase in value over time).
Edit: I have trouble multiplying by 4... :-P
My company has 10 shares total and I manage to get you to buy one of them for $100. The logical conclusion is that the shares are worth $100 each and the company is worth $1000. You hold 1 share, and I hold 9 shares. I also have the $100 you gave me. So one can say that you bought 10% of the company at a $1000 valuation.
But let's say I don't do anything at all with the money you gave me and I had no other money to begin with. What that means is that you have 1 share and I have 9 shares and $100. If we liquidated the company now, you would get $10 back and I would keep $90. The company has a value of $100.
Now let's say that somebody is really interested in buying shares. I give you the OK to sell your share and somebody offers to buy it for $10,000. You sell your share for $10,000 (10% of the company). The logical conclusion is that the other 9 shares are worth $90,000 and the whole company has a valuation of $100,000. But I still only have $100 in the bank :-)
Now, let's say that encouraged by the huge profit you made, you buy 4 shares at $20,000 each from me. The valuation of the company is logically $200K because there are 10 shares and the last time someone bought some it was for $20K each. You own 40% of the company. I own %50 of the company and they person who bought the original share from you owns %10 of the company. The company has $80,100 in the bank. You try to sell your 4 shares now, but nobody wants to buy. The shares have a nominal value of $8,010 each ($80,100 / 10 shares), but nobody feels like buying. Your shares are worth 0 because I control the company and don't want to liquidate. Basically, I conned you into giving me $80,100 :-)
Shares are worth what other people are willing to pay for them. Whether or not someone will be willing to buy your shares back for the current "valuation" of the company depends a lot on the circumstances. Whether you are even able to sell your shares depends on agreements you made, etc, etc. You can easily have a company with a $1 billion valuation whose stock is worth less than toilet paper in reality.
Companies that are pre-IPO are really ripe for the hype machine. You generally can't trade their stock except at a "liquidation event". You can invest in them, and their valuation might climb, but you can actually realise any of that profit. If they pull a Theranos on you, then you lose all of that money. Once a company has IPOed, the stock is traded freely on the stock market. Since it is liquid, you are more likely to be able to sell your stock close to its current valuation. Keep in mind that this is still not the same as value -- stocks usually trade a prices of multiples of the current value (because people believe the companies will increase in value over time).
Edit: I have trouble multiplying by 4... :-P
Outside of the obvious increase in value, it tends to be lost that VCs are money managers.
Mark-ups serve as marketing for the next fund which they get a % of an annual basis. The time horizon to see any company turn to cash is so long that their major day-to-day level is to market a strong rising portfolio to new LPs for more money to manage.
Mark-ups serve as marketing for the next fund which they get a % of an annual basis. The time horizon to see any company turn to cash is so long that their major day-to-day level is to market a strong rising portfolio to new LPs for more money to manage.
Artificially inflating a valuation is not in VC interest - after all, an inflated valuation means that they're getting less % shares of the company for the same money.
VCs generally don't get any meaningful impact from intermediate numbers, they get their numbers - both regarding investor returns and their carry fees - only on exits. So the share they get for that money has a direct impact on how much money the VC personally takes home after the exit. Any before-exit valuations have only a PR effect for them (which may be a factor if they want to raise a new round anyway right now, and are failing at that - but if they can raise a new round, then this PR won't bring them any extra profit), and any useful effect on the secondary market is too far in future; if there's an investment round happening now, then any potential buyers would be in that investment now; at this point the participating VCs are participating because they want to increase (or at least maintain) their share, not divest it - and if they want to divest after a year or so, the valuation PR effect will have faded.
The benefits of such a valuation to the startup, on the other hand, are much more clear.
VCs generally don't get any meaningful impact from intermediate numbers, they get their numbers - both regarding investor returns and their carry fees - only on exits. So the share they get for that money has a direct impact on how much money the VC personally takes home after the exit. Any before-exit valuations have only a PR effect for them (which may be a factor if they want to raise a new round anyway right now, and are failing at that - but if they can raise a new round, then this PR won't bring them any extra profit), and any useful effect on the secondary market is too far in future; if there's an investment round happening now, then any potential buyers would be in that investment now; at this point the participating VCs are participating because they want to increase (or at least maintain) their share, not divest it - and if they want to divest after a year or so, the valuation PR effect will have faded.
The benefits of such a valuation to the startup, on the other hand, are much more clear.
> VCs generally don't get any meaningful impact from intermediate numbers, they get their numbers - both regarding investor returns and their carry fees - only on exits.
The incentives can change if you look one level deeper. VCs often need to start raising a new fund before all the positions in their existing fund are fully liquid. By artificially inflating the valuations of their old fund, they can demonstrate high performance to LPs, which may help them raise more capital for the new fund.
The incentives can change if you look one level deeper. VCs often need to start raising a new fund before all the positions in their existing fund are fully liquid. By artificially inflating the valuations of their old fund, they can demonstrate high performance to LPs, which may help them raise more capital for the new fund.
It's true, however, if we look at what impacts the money that VCs actually get themselves, "help them raise more capital for the new fund" only matters if they're having trouble with raising that round (as I mention in the post above).
In normal circumstances, where they can raise the amount the next round should have (i.e. one that they can invest with a good return) this isn't helpful. More capital for the fund doesn't necessarily benefit them - they need enough pledged money for the fund, but if they get the ability to pay twice as much for the same startups, that only decreases their take-home carry after the fact; if they have so much capital that they have to invest it in worse startups just to invest it in the expected timeline - that means worse results and less profit for them; if they raise extra capital for the fund that's sitting unused, then it decreases their overall profitability ratios and again means less profit for the VCs personally.
However, if it's difficult for them to get enough investors for the next round (e.g. during an economic downturn) then yes, in such particular cases the PR advantage might be useful. But it's not in most cases, and not now, and the impact isn't that much - the organizations who invest in VC funds (i.e. the limited partners) aren't stupid as well, they can afford to do a lot of due diligence and all the data for the valuations and discussions and doubts about the valuations is available for them. You could just as well argue that if they inflate valuations, then the community of limited partners might think that they're not prudent with their money and avoid investing in their next fund. PR smoke and mirrors works well on the general public, but less well (though not at zero effect) on the large investing institutions.
In normal circumstances, where they can raise the amount the next round should have (i.e. one that they can invest with a good return) this isn't helpful. More capital for the fund doesn't necessarily benefit them - they need enough pledged money for the fund, but if they get the ability to pay twice as much for the same startups, that only decreases their take-home carry after the fact; if they have so much capital that they have to invest it in worse startups just to invest it in the expected timeline - that means worse results and less profit for them; if they raise extra capital for the fund that's sitting unused, then it decreases their overall profitability ratios and again means less profit for the VCs personally.
However, if it's difficult for them to get enough investors for the next round (e.g. during an economic downturn) then yes, in such particular cases the PR advantage might be useful. But it's not in most cases, and not now, and the impact isn't that much - the organizations who invest in VC funds (i.e. the limited partners) aren't stupid as well, they can afford to do a lot of due diligence and all the data for the valuations and discussions and doubts about the valuations is available for them. You could just as well argue that if they inflate valuations, then the community of limited partners might think that they're not prudent with their money and avoid investing in their next fund. PR smoke and mirrors works well on the general public, but less well (though not at zero effect) on the large investing institutions.
> By artificially inflating the valuations of their old fund, they can demonstrate high performance to LPs, which may help them raise more capital for the new fund.
Where is the line between that and a ponzi scheme? How legal the artificial inflation is? Or is it that the valuation that's being artificially inflated isn't a return per se, but rather highly correlated with returns?
Where is the line between that and a ponzi scheme? How legal the artificial inflation is? Or is it that the valuation that's being artificially inflated isn't a return per se, but rather highly correlated with returns?
This is a double-edged sword for private companies.
On the positive, it's generally good to raise money when you don't need it. You're more likely to get the most favorable terms. (Or, stated diffrently, it's hardest to raise money when you need it most, with a zero cash date looming).
On the negative, it creates a high bar to clear for the next round of funding. If you don't raise enough, and need more funding later, doing a down round is extremely painful. Worse, if you have anti-dilution and other provisions, the cap table gets blown up. Lots of agita.
Public companies: different circumstances (market cap is a currency for acquisitions).
Finally, I'm respectful of audacious and aggressive entrepreneurs, but I've got a very sensitive hubris detector. A billion is an arbitrary ego number, and "We don’t entertain offers.... . . and it’s literally not worth the time of day, talking" is crazy. Tell that to Groupon shareholders that held stock during Google's (reported) ~$6b offer in 2010. Ouch. Pride goeth before the fall.
On the positive, it's generally good to raise money when you don't need it. You're more likely to get the most favorable terms. (Or, stated diffrently, it's hardest to raise money when you need it most, with a zero cash date looming).
On the negative, it creates a high bar to clear for the next round of funding. If you don't raise enough, and need more funding later, doing a down round is extremely painful. Worse, if you have anti-dilution and other provisions, the cap table gets blown up. Lots of agita.
Public companies: different circumstances (market cap is a currency for acquisitions).
Finally, I'm respectful of audacious and aggressive entrepreneurs, but I've got a very sensitive hubris detector. A billion is an arbitrary ego number, and "We don’t entertain offers.... . . and it’s literally not worth the time of day, talking" is crazy. Tell that to Groupon shareholders that held stock during Google's (reported) ~$6b offer in 2010. Ouch. Pride goeth before the fall.
> If you don't raise enough, and need more funding later, doing a down round is extremely painful.
I hear this a lot, but I don't quite understand the sentiment. It's painful for whom? The earlier investor, sure, but not the founders.
Scenario 1: I have a round of funding at $1MM valuation then later a round of funding at a $10MM valuation.
Scenario 2: I have a round of funding at $100MM valuation then later a round of funding at a $10MM valuation.
Scenario 2 has a down round, but it's unclear to me how anyone in this scenario is worse off besides the suckers who bought in at a too high valuation. They just overpaid; that's all. The business and the other shareholders are strictly better off because they were able to get more cash for the shares sold.
I hear this a lot, but I don't quite understand the sentiment. It's painful for whom? The earlier investor, sure, but not the founders.
Scenario 1: I have a round of funding at $1MM valuation then later a round of funding at a $10MM valuation.
Scenario 2: I have a round of funding at $100MM valuation then later a round of funding at a $10MM valuation.
Scenario 2 has a down round, but it's unclear to me how anyone in this scenario is worse off besides the suckers who bought in at a too high valuation. They just overpaid; that's all. The business and the other shareholders are strictly better off because they were able to get more cash for the shares sold.
The investors of the that $100MM round very likely have some downside protection in the agreements, so that the following down round disproportionally dilutes all the owners before that $100MM round - the founders, initial investors, and employees.
Yep, https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidat... is a decent overview. An oversimplified scenario might be that if a VC invests $25mm at a pre-money $100mm valuation with a 2x liquidation preference, and the company eventually sells for say $60mm (or raises money in a down round at that valuation, which doesn't bode well for a sale price much greater than that)... then the VC would get $50mm before any other investors, including founders, could split the remaining $10mm. What was once a 20% share of the company given to that VC balloons to a 5/6 share of the company. Not fun for founders and early investors.
QUESTION: What is the difference between an "accredited" investor giving a company money at a billion dollar valuation and just another regular person?
If A16Z gives a company 100M at a 1B valuation, it becomes a unicorn. Does the same apply if my neighbor gives me 400M for 40% (1B valuation) of my company? Does that make my company a unicorn?
If it does, what about if he gives me $1000 for 1 millionth of my company? Or maybe with 5 or 6 other investors bringing on their $1000 as well at the same valuation and adding validation?
Whose valuation counts and why?
If A16Z gives a company 100M at a 1B valuation, it becomes a unicorn. Does the same apply if my neighbor gives me 400M for 40% (1B valuation) of my company? Does that make my company a unicorn?
If it does, what about if he gives me $1000 for 1 millionth of my company? Or maybe with 5 or 6 other investors bringing on their $1000 as well at the same valuation and adding validation?
Whose valuation counts and why?
"Accredited investor" in legal regulation terms is mostly a polite way to say "has enough money to not be permanently ruined if one of their big risky investments ends up in the hole".
That is to say, if your neighbor has 40 million dollars in the first place, he almost certainly counts as "accredited", unless he's also got 50 million sitting around in liabilities.
That is to say, if your neighbor has 40 million dollars in the first place, he almost certainly counts as "accredited", unless he's also got 50 million sitting around in liabilities.
Their tools reminds me of Borland's Turbo Pascal --- in that it made programming accessible to the masses .. well us geeky kids then. I wonder if Borland's acquisition price comes close to $1Bn in today's dollars.
$75M in 2009. So no, not remotely.
Borland declined dramatically. https://www.cnet.com/news/borland-a-big-lesson/ reckons Borland peaked at a $7 billion valuation, and they did spend hundreds of millions on campuses and acquisitions in the early 90s.
Would love to hear from other founders here comment on raising money when you don’t need to raise. To me it seems unfair to dilute employee equity for the sake of having an extra 100M in the bank.
"I’m a big fan of Slack Technologies Inc.’s approach to corporate finance. Near the peak of the unicorn boom, in 2015, Slack Chief Executive Officer Stewart Butterfield correctly noted that “it might be the best time for any kind of business, in any industry, to raise money for all of history, like since the time of the ancient Egyptians.” The relevance of that point to Slack was not obvious, though, because it happened to have all the money it needed. A less financially savvy tech unicorn might have taken that as a reason not to raise more money, but Slack decided that cheap money was cheap money.
...Is 2019 the best time in history for tech unicorns to raise money from the public markets? Ehh, not particularly. The S&P 500 is down more than 10 percent from its peak last year. Volatility is up. There is an overhang of several very large rumored unicorn initial public offerings, most notably one from Uber Technologies Inc., which might distract investors from other
unicorns. Fortunately for Slack, it still doesn’t seem to need any money, perhaps because it did so very much top-ticking in the private markets. This gives it a certain amount of flexibility with respect to corporate finance. So:
Slack Technologies Inc. is planning to go public through a direct listing, "
https://www.bloomberg.com/opinion/articles/2019-01-11/direct...
Slack Technologies Inc. is planning to go public through a direct listing, "
https://www.bloomberg.com/opinion/articles/2019-01-11/direct...
ya but if you raise an extra 100M, that most likely is an up-round, which means the value of employee's equity has increased
example: as an employee you own 10% of the company. The 10% is worth $10. After company raises a 100M round and dilution has occurred, you own 1% of the company, but that 1% is now worth $50
who is being treated unfairly? I don't quite understand
example: as an employee you own 10% of the company. The 10% is worth $10. After company raises a 100M round and dilution has occurred, you own 1% of the company, but that 1% is now worth $50
who is being treated unfairly? I don't quite understand
The problem arises when the company exits at below the ridiculous valuation, inflated by the up rounds.
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit. This means that while the employee private equity may increase in value, the employees get pennies on the dollar during the exit because the majority of the payout goes to the investors who inflated the price to begin with.
It gets worse when employees pay taxes on the equity at the inflated valuation, but there are ways claw that back later.
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit. This means that while the employee private equity may increase in value, the employees get pennies on the dollar during the exit because the majority of the payout goes to the investors who inflated the price to begin with.
It gets worse when employees pay taxes on the equity at the inflated valuation, but there are ways claw that back later.
> The problem arises when the company exits at below the ridiculous valuation, inflated by the up rounds.
But you don't have the counterfactual to know what the company would have exited for without the ridiculous valuation. Probably a lower number.
But you don't have the counterfactual to know what the company would have exited for without the ridiculous valuation. Probably a lower number.
An exit is an exit. Failed companies getting acquired is still an exit, whether it happened early without funding or later with a ridiculous valuation.
The difference is the expected value of income that the employees are given in equity, which is especially nefarious.
The difference is the expected value of income that the employees are given in equity, which is especially nefarious.
Investors in the unicorn know it's a ridiculous market cap, but will lock in preferential payout on the exit.
This is not a thing that happens in the vast majority of circumstances. Preferences are for downside protection not a way for investors to actually make money. No one invests with the goal of making use of them.
This is not a thing that happens in the vast majority of circumstances. Preferences are for downside protection not a way for investors to actually make money. No one invests with the goal of making use of them.
The "vast majority of circumstances" are not investment rounds propping up a unicorn.
Investors who play in this arena are not stupid: https://angel.co/blog/liquidation-preference-your-equity-cou...
Investors who play in this arena are not stupid: https://angel.co/blog/liquidation-preference-your-equity-cou...
Good Technology had $556 million in funding:
https://www.crunchbase.com/organization/good-technology
Per your link, they sold for $425 million.
The investors lost money.
That is not the outcome they were hoping for. However, their preferences did provide them downside protection which was, as I noted, their purpose.
https://www.crunchbase.com/organization/good-technology
Per your link, they sold for $425 million.
The investors lost money.
That is not the outcome they were hoping for. However, their preferences did provide them downside protection which was, as I noted, their purpose.
Per both links:
1) Good Technology was valued at $1.1 Billion.
2) The investors lost money, but the employees lost much more.
-> This is the problem with unicorns.
You've completely missed the point.
1) Good Technology was valued at $1.1 Billion.
2) The investors lost money, but the employees lost much more.
-> This is the problem with unicorns.
You've completely missed the point.
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#2 is not at all clear. Investors lost (collectively) over 125 million dollars. The only employess that lost money are those that exercised stock options and had to pay taxes on unrealized gains. It's highly doubtful that this totaled nearly as much as the investors lost.
The value of the company has increased either way, the fact a round happens doesn't change the underlying value but merely signals it. Since employees generally can't sell their shares either way that signaling doesn't impact them. So, in your example, before the round you actually owned $500 and after the round you own $50.
No. I see what you mean, but in practice that's not what happens.
Numeric value is determined at time of sale. Without a sale, the object has no "value". It might be useful to you in some way, but it's value is 0 unless you can sell it. There is no such thing as "underlying value"
example: I have a normal orange that I bought for $5 at the supermarket. The orange's underlying value is $5. If I sell it to my friend for $10, the value of the orange is now $10. If no one is willing to buy it, its value is $0.
The same thing happens when you raise a new round. When you raise a new round, you've made a "sale": someone paid money for it. That exchange of money/shares is what determines value.
Numeric value is determined at time of sale. Without a sale, the object has no "value". It might be useful to you in some way, but it's value is 0 unless you can sell it. There is no such thing as "underlying value"
example: I have a normal orange that I bought for $5 at the supermarket. The orange's underlying value is $5. If I sell it to my friend for $10, the value of the orange is now $10. If no one is willing to buy it, its value is $0.
The same thing happens when you raise a new round. When you raise a new round, you've made a "sale": someone paid money for it. That exchange of money/shares is what determines value.
While I agree that selling something at the highest price you can is the best way to appraise value, I disagree that an up round necessarily increases the equity value of employees (unless the employees can sell off their equity during the round).
To use your orange metaphor, while it is true that if no one else wants the orange the value of the orange is $0, I don't have to sell it to have a good idea of what the price of an orange is. For example, if there are people offering to buy my orange for $8 and I know that a typical bid-ask spread for fruits is %50 of the bid and most transactions occur at midpoint I can be relatively certain that the orange is worth $10 despite no transaction occurring and there being no market for oranges (if there is a generic orange market you have access to then the entire point becomes moot since you can just take the market price).
To use your orange metaphor, while it is true that if no one else wants the orange the value of the orange is $0, I don't have to sell it to have a good idea of what the price of an orange is. For example, if there are people offering to buy my orange for $8 and I know that a typical bid-ask spread for fruits is %50 of the bid and most transactions occur at midpoint I can be relatively certain that the orange is worth $10 despite no transaction occurring and there being no market for oranges (if there is a generic orange market you have access to then the entire point becomes moot since you can just take the market price).
yes, but the key part of your statement is "if there are people offering to buy". Everything else about spread/bid/ask/etc is just mathematic sugar.
"People offering to buy" is key.
It's very easy for a founder to tell employees "hey I met with a VC yesterday, and they were interested in investing at $x a share!". It's easy to say that, but making it actually happen is the real deal. When someone sign on the dotted line and hand over real $. It's a much more accurate test of value.
"People offering to buy" is key.
It's very easy for a founder to tell employees "hey I met with a VC yesterday, and they were interested in investing at $x a share!". It's easy to say that, but making it actually happen is the real deal. When someone sign on the dotted line and hand over real $. It's a much more accurate test of value.
> So, in your example, before the round you actually owned $500 and after the round you own $50.
That's not how the math works. In the prior round people didn't know the value of the company. Maybe it was worth $100M, maybe it was worth zero. The expected value (weighted average probability of all scenarios) of your stake in the company was worth $10 per the parent
That's not how the math works. In the prior round people didn't know the value of the company. Maybe it was worth $100M, maybe it was worth zero. The expected value (weighted average probability of all scenarios) of your stake in the company was worth $10 per the parent
It's always good to take credit if you're reasonably sure you can make a return greater than the cost. When money is flowing easily, and therefore the cost is low, there is a good chance that you can make a great enough return to outweigh the cost.
Money is cheap right now, so it makes sense to get a lot of it while you can so you can ride out the next downturn when money will be expensive.
Money is cheap right now, so it makes sense to get a lot of it while you can so you can ride out the next downturn when money will be expensive.
So stacking up debt is how you stay on top of a downturn in the economy when it comes?
Yes, if you have a good plan on using the money. Keep in mind that these are investments, not loans. So they don't have to be paid back. The investor is taking the risk that they believe you can do something with the money.
When I say that "money is cheap" I mean in dilution cost, not interest. Although to be fair a lot of corporate debt can be written off without destroying to company so it's not a bad option for bigger companies to issue debt either.
When I say that "money is cheap" I mean in dilution cost, not interest. Although to be fair a lot of corporate debt can be written off without destroying to company so it's not a bad option for bigger companies to issue debt either.
It can be. See Ford in the mid-2000s under Alan Mulally--that was his play and it was spectacularly successful compared to the counterexamples at GM and Chrysler.
if you're raising at a higher val, then owning a smaller % of something worth more is not a bad thing...
Raising money doesn't make you worth more.
It absolutely does because then you have the money.
It might not make an individual share worth more (because of dilution), but it 100% absolutely makes the total value of the company go up.
It might not make an individual share worth more (because of dilution), but it 100% absolutely makes the total value of the company go up.
It does if the implied valuation is higher. And it signals to the market that you're worth $x which is greater than your prior valuation (assuming one exists), which anchors the price a buyer will pay for your business
I wonder if anyone has statistics on how often a new funding round increases valuation enough to offset dilution. I suspect that's generally the case, but I may be biased by the fact that funding rounds I hear about are more likely to be the successful ones.
raising money by itself doesn't, but it does if you are raising at a higher valuation and the share price increases.
It is actually quite stupid to get a unicorn valuation if you are not a really good fit for world conquering business. In all other regards it is people gambling using other people's money and using your time&health. Most ideas simply aren't that kind of idea. And if you don't get other investors with your idea think about simply doing a full time job and considering your project a hobby. It can still turn to make you a tidy profit. And I can promise you that if you are talented you can also work for big corps and enjoy a good life there. Sure the tasks don't seem to be very meaningful, but if you fake a new chat app as a unicorn startup it's not that much more meaningful either.
Curious, how do these products get introduced at established companies? I suspect training and adopting new workflows adds lots of friction, so how do they do it?
It happens organically with Airtable. We do custom implementations of it with companies. Most get started by someone because its so easy to get up and going but then reach a point where they need some more expertise and bring us in.
> until somewhat recently, we’ve been able to sustain our operations without any external capital [owing to] a product that monetizes itself, from a customer base that gets real value from us.
Translating this bafflegab into english is educational:
> We used to be profitable because people liked our product enough to pay more for it than it cost us to produce. Now we're not, so... unicorn?
Translating this bafflegab into english is educational:
> We used to be profitable because people liked our product enough to pay more for it than it cost us to produce. Now we're not, so... unicorn?
What is the difference between
It's much much easier to hire good engineers at a lower payrate when the signaling is good because they actual believe the paper equity they get is actually worth something down the road.
In the same vein, positive signals and the good press that comes with it helps you win business. In our case (no where near a unicorn), but we were featured in a local paper. That paper was seen by the CEO of a company we were in negotiations with and were stuck down on a lot of DD work. They wanted all these assurances we would still provide services and won't just take the money and go bankrupt a year later etc etc.
CEO saw us described as the "next big thing in X" and intervened. He told us later he "knew" we were going to be huge and wanted to lock us in early as a partner. Contract was signed less than a week later.
Unicorn status is largely a vanity metric, but it's also a power signal that if used correctly, gives a lot of benefits to the startup.