From the category archives:

PE & VC News

A couple of professors out of Stanford University and the University of British Columbia are out with a new, fresh look at the intricacies of venture capital valuations (Squaring Venture Capital Valuations with Reality, National Bureau of Economic Research Paper #23895).  Their topic is unicorn valuations, and specifically whether so-called unicorn valuations are frequently overvalued.  Before discussing their results, what would you guess their conclusions are?  Would you guess – simply out of preconceived notions or an expert guess – that companies achieving unicorn valuations are typically overvalued or undervalued?  Remember, investors that agree with unicorn valuations are usually sophisticated investors, not some new guy off the street.  Take your guess.

Valuations

The authors reviewed 135 venture capital-backed private companies with a post-money valuations of $1 billion or more.  The value of the unicorn was determined using financial terms from legal filing and reported post-money valuations.  Overall, they find that, on average, unicorn firms are overvalued by 50 percent, with 15 of the firms studies being over 100 percent overvalued, compared to their fair market value.

Their findings are based upon calculations of values for each share class, which produces lower valuations because most unicorn companies offer recent investors preferred status, such as IPO return guarantees (14 percent), vetoes over down-IPOs (24 percent), or seniority to all other investors (32 percent).  Investors with common stock shares lack such protections and are thus, on average, around 58 percent overvalued.  Interestingly, after adjusting for these valuation-inflating measures, around half of all unicorns eventually lose their unicorn status.

Here’s a look at the valuation figures by percentage overvalued.  the peak occurs around 25 percent, meaning that 25 of the 135 valuations were overvalued by around 25 percent.  Interestingly, none of the authors’ sample firms were undervalued, representing a potential flaw in the study.

Picture1 Source: Gornall and Strebulaev (2017)

 

The following figure provides another view of the results.  The blue line represents the fair value of the unicorn companies.  The orange line is the post-money valuation.  Unsurprisingly given the authors’ views on valuations, the fair value of the unicorn companies is always less than the post-money valuations.

Picture2 Source: Gornall and Strebulaev (2017)

 

Conclusion

In an interesting look at the intricacies of venture capital valuations, authors William Gornall and Ilya Strebulaev find that unicorn companies – companies with post-money valuations of greater than $1 billion – are frequently overvalued, and that even sophisticated investors often do not understand the workings of specific venture capital valuations.  Overall, the authors find that, on the average, unicorn firms with venture capital-backing are highly overvalued, perhaps by around 50 percent.  So, the next time you think it is or would be cool to be a venture capital investor, remember that it’s highly likely that many of the deals you come across will be terrible financial investments.  Invest with caution.

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The 2017 Startup Graveyard

January 23, 2018

Pitchbook  is out with a fascinating look at the so-called 2017 “startup graveyard”.  There are 11 companies on Pitchbook’s list. Let’s take a look.

The Startup Graveyard

On top of Pitchbook’s list of notable 2017 failures is Jawbone.  Jawbone manufactured speakers and wearable technology, and at one point had a valuation of $1.5 billion, with $542 million in venture capital raised.  It is now dead.

The next largest startup to be put to rest in 2017 is Quixey.  At one point, Quixey was worth an amazing $600 million.  That paper wealth has since evaporated, along with the $134 million in venture capital funding that was raised.  Apparently it must be difficult competing with other application search engines.

The third largest startup to die last year is JuicEro.  JuicEro was once worth $459 million, having grabbed the confidence of enough venture capitalists for $121 million in outside investments.  Sadly, the San Francisco-based startup’s attempt to create a high-end juicer is no more, having succumbed to the pressure of negative press and complaints regarding the usefulness of its juicer product compared to the price.

The fourth largest startup to bite the dust in 2017 is Yik Yak.  The location-based social networking site had at one point at whopping valuation of $400 million and had raised $75 million in venture capital funding.  Unfortunately for Yik Yak’s investors, competing with Facebook and other social networking sites provide too daunting.

In fifth place is hello, a bedside sleep-tracking tool.  The application met its demise in 2017 after having gained a valuation of $276 million and having raised $41 million from venture capital investors.  What’s the lesson learned here?  Getting people interested in sleep-tracking may not be as easy as some would suppose.  May hello enjoy its long slumber.

In sixth place is PEARL, a manufacturer of automotive devices.  At one point, PEARL had achieved a valuation of $197 million and had raised $50 million from venture capital investors.  The Scotts Valley, California started is no more.

In seventh place is sprig, a food delivery and subscription service.  At its final funding round, sprig was thought to be worth an amazing $169 million, and had raised $59 million from venture capital investors.  Sadly for employees and investors of sprig, competing in the food delivery and subscription service business isn’t as easy as it seems.

In eighth place is TEFORIA, a tea infusion device.  TEFORIA reached a peak valuation of $35 million before it died, taking the $17 million it raised from venture capital investors with it.

In ninth place is Qliance, a healthcare network of primary care clinics.  Qliance is no more, having met its demise in 2017 with a peak valuation of $34 million and total venture capital raised of $37 million.

In tenth place is simple.tv, with a peak valuation before death of $30 million and total amount raised from venture capital investors of $12 million.  Unfortunately for simple.tv’s investors and customers, profitability wasn’t achievable, and the TV recording tool has been laid to rest.

Lastly, in 11th place is imzy, with a peak valuation before death of $26 million and total venture capital funding raised of $11 million.  Sadly, the Salt Lake City-based friendly social platform didn’t gain enough traction, and is now dead.

startup graveyard Source: Pitchbook

Conclusion

In an interesting look at Pitchbook’s 11 notable startup failures, the list of failures sums to about $3.8 billion in company valuations that disappeared into thin air.  Losses on venture capital investors’ books amounted to about $1.2 billion.

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The 2017 year is over, and as such, what better time than now to take a look at how things performed in 2017.  The topic is mergers and acquisitions (M&A) in emerging technology.

Top Corporate Acquirers Since 2007

Before looking at the 2017 figures, which corporate acquirer would you guess comes out on top since 2007?  Would you guess Intel, the typical stalwart in technology acquisitions?  Perhaps Microsoft or Apple, two of the dinosaur behemoths in the industry?  Take your guess, because the answer, according to private equity data provider Pitchbook, follows.

Interestingly, although not too surprising, the top M&A acquirer since 2007 is Google’s parent company Alphabet, with its most active technology vertical of artificial intelligence.  Since 2007, Alphabet has made 46 deals amounting to an estimated $3.2 billion.  The biggest acquisition deal of Alphabet over this period is the internet-of-things maker Nest Labs.

According to the number of deals, IBM comes in second at 28 deals and $850 million in spending.  IBM was most active in the cybersecurity space, with its largest deal being Trusteer.

In third place is Cisco at 25 deals.  Cisco was most active in the cybersecurity area, and its largest acquisition target was WebEx Communications.  Interestingly, Cisco spent a lot more than IBM, doling out $3.2 billion for its acquisition targets.

In fourth place place is 3D Systems with 25 deals.  3D Systems’ most common technology vertical was 3D printing (surprise!), and spending $135.5 million.  3D System’s largest acquisition was Z Corporation.

In fifth place are a couple of firms with 24 deals a piece – Publicis Groupe and Accenture.  Publicis spent $14.5 million euro on its acquisitions.  Its largest active technology vertical was Adtech and its largest deal was Chemistry Communications.  Accenture’s most active technology vertical was in cybersecurity and marketing technology, with its largest target being Procurian.  Overall, Accenture spent $375 million in acquisition deals was 2007 through 2017.

v1 Source: Pitchbook

Top Corporate Acquirers in 2017

With the recent history as the backdrop, which companies would you guess were most active in emerging technology acquisitions in 2017?  Take your guess, because the results are shown below.

On top of the 2017 corporate acquirers in emerging technology turns out to be Accenture, having made 7 deals in 2017 alone.  Accenture’s most active technology vertical this past year was marketing technology, and its most notable deal was SinnerSchrader.

In second place was Symantec with 5 deals.  Symantec’s most active vertical was cybersecurity and its most notable deal was LifeLock.

Tied for second place was Alphabet at 5 deals.  Alphabet’s most active vertical was artificial intelligence and its most notable 2017 deal was Senosis Health.

The remaining members on the top 2017 acquirers includes Snap Inc., Phillips, and fiserv.  These three companies made a total of 12 acquisitions in 2017 in areas ranging from adtech to healthtech to fintech.

v2 Source: Pitchbook

Conclusion

In an interesting review of Pitchbook’s findings on M&A in emerging technology, the most active 2017 corporate acquirer was Accenture.  If one broadens the time frame since 2007, the most active acquirer turns out to be Alphabet.  It’s an actively competitive world in emerging technology today.

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A Look Back at Venture Capital in Recent Years

December 25, 2017

The year is almost over, and what better time to take a look back at the state of venture capital over the past few years than now. Distributed to Paid in Capital (DPI) Multiples First off, which year between 2006 and 2013 would you guess would have the best DPI multiples?  Would you guess perhaps […]

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How Did Financial Job Growth Compare in 2017?

December 12, 2017

The year is almost over, which makes now a perfect time to take a look back and see how job growth in the financial industry did compared to other industries.  Here’s a look. The Broad View Before looking at the growth in jobs in the financial sector compared to all other sectors, here’s a background […]

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What are the 18 Most Valuable E-Commerce Startups in the U.S.?

November 27, 2017

Pitchbook, the private equity and venture capital data provider, is out with an interesting look at e-commerce startups in the U.S. Without looking at the following list of the 18 most valuable startups in the U.S., which companies would you guess would be on the list? Would you guess Dollar Shave Club, or Jet, or […]

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An Update on Private Equity Fund of Funds

November 13, 2017

Preqin, the investment intelligence data provider, recently released their special report on the state of private equity funds of funds across the world.  Here’s a look. Where are the Private Equity Fund of Funds Managers? First, a question – where would you guess the most managers of private equity fund of funds are located?  The […]

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Why Don’t Ex-Startup Founders Make for Better VC Partners?

October 30, 2017

In an interesting piece out of CB Insights, Dan Mindus and Max Wessel pose the question – “Do Ex-Startup Founders Make the Best Venture Capitals?”  What would be your guess?  The “intuitive” answer, at least among entrepreneurs, is that ex-startup founders do make for better VC partners.  Why?  Because successful ex-startup founders have walked the […]

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Is Private Equity Headed for a New Buyout Boom?

October 2, 2017

By most measures, the global economy is continuing on a healthy, expansionary path.  Leading the way is the American economy, with the most recent growth figure coming in at a 3.1 percent annualized pace.  The healthy state of the global economy begs the question: is private equity headed for a new buyout boom? Here’s what the […]

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Which Firms Back the Most Unicorns?

September 18, 2017

The question here is simple – which financial firms have the largest exposure to unicorn companies?  Take a guess, because the answer follows shortly.  But, before getting into the list, a review of the top unicorn companies follows. The List of Unicorns First, what is a unicorn?  A unicorn is a company with a private […]

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