Consistent & Transparent Valuation of 'Unicorns' WEBINAR 2ND NOVEMBER AM EST

Transcription

1 Consistent & Transparent Valuation of 'Unicorns' WEBINAR 2ND NOVEMBER AM EST

2 Agenda 2 Welcome Ian Blance Voltaire Advisors Introduction: New Research on Unicorn Valuations Ian Blance, Voltaire Advisors Unicorn M&A and Valuation Trends Justin Kuczmarski, NAV Valuation & Advisory Methodologies for Early Stage Private Equity Valuation Keith Smith, Managing Director, Empire Valuation Consultants Audience Q&A 1100 Close of Webinar

3 3 Introduction: New Research on Unicorn Valuations Ian Blance Managing Director Voltaire Advisors

4 Introduction u u u u u What is a 'Unicorn? Unicorns are private (usually tech) companies without much of a performance record who have an estimated valuation of $1bn or more. Crunchbase lists 267 unicorns as of today including such widely held investments as Uber, Airbnb and Spotify. Concern has been brewing at the SEC about valuation of these interests for a couple of years, and this was thrown into much sharper focus with the 'sweep' letter to investment companies in late It has been widely reported that valuations for these types of private investments vary significantly between different fund groups and even between different funds within the same group. We covered these issues in our March Webinar: Webinar Unicorn Pricing Since this event there has been new research on how widely held are these companies and how they are valued. This webinar provides an update on the issue. 4

5 Mutual Fund Investment in Unicorns 5 u Recent research looked at investment in private firms by public mutual funds u 16 mutual fund families surveyed o o o 1995 only 2 funds held shares in only 3 private firms 2010 this was 20 funds in 21 firms 2015 it was 92 funds and 93 firms u 38% of IPOs in 2016 had previously received mutual fund financing u 33% of capital raised in was provided by mutual funds u Little wonder that SEC became concerned!

6 Valuation of Unicorns 6 u New research also suggests that funds are still getting valuations wrong u Looked at 116 unicorns formed after 1994 that raised a round after 2004 u Funds overvalued unicorns by average of 51% u All 116 companies were overvalued according to their model u 13 firms were overvalued by more than 100%! u u u 53 firms lost unicorn status when the model was applied Overvaluation results from applying price from most recent financing to all stock classes Average unicorn has 8 stock classes with varying rights

7 7 Unicorn M&A and Valuation Trends Justin Kuczmarski President NAV Valuation & Advisory

8 Bio of Justin Kuczmarski President of NAV * (212) Mr. Justin Kuczmarski, MBA, CPA, CVA, CIRA, ABV, CFF, is the President of NAV Valuation & Advisory LLC ( NAV ). Prior to founding NAV, Mr. Kuczmarski served as a NYC Practice Leader in Financial Advisory Services for a top 10 accounting and advisory firm. He also has senior M&A investment banking experience as a Valuation Practice Leader for a leading M&A boutique bank. In 2011, he was a Finalist for Crain s New York Top 40 under 40. In 2016, Mr. Kuczmarski was a recipient of the NACVA 40 Under 40 from the nation's leading valuation association, the National Association of Certified Valuation Analysts (NACVA). He is a frequent TV commentator on technology valuation and M&A for global networks i24, China Central TV (CCTV), and China Global Television Network (CGTN). Mr. Kuczmarski possesses a unique background combining senior experience in both M&A investment banking and financial advisory services. He brings a strong, real-world M&A experience to his delivery of valuation services, financial advisory, forensic support, and M&A corporate finance. He has led or participated in over 150 transactions since He specializes in the following industries: asset management, business services, healthcare, real estate, and technology. Notable clients include some of the nation s leading alternative investment funds, law firms, and private businesses. In , Mr. Kuczmarski led the due-diligence and initial public market valuation / pricing of two high-profile technology IPOs. He has also successfully defended his analysis before the IRS in multiple tax compliance appraisals. Mr. Kuczmarski has performed and reviewed thousands of fund valuations during his career. He is frequently approached to serve as a litigation expert consultant or litigation expert witness, and he has been retained in several billion dollar commercial cases throughout his career. Mr. Kuczmarski is the sole author of the 300-page guidebook entitled The Executive s Guide to Business Valuation: Essentials for Advisors and Business Owners. Mr. Kuczmarski received a B.A. in Politics from Princeton University. He also received an MBA from Fordham University in both Finance and Professional Accountancy, where he attended on full academic fellowship. Page 8

9 Unicorn M&A and Valuation Trends The extent of unicorn valuations, defined as private firms valued above $1.0 billion, has accelerated since The threat of a bubble burst has increased. The overvaluation of many unicorns continues to loom large. Prior to 2015, 5 to 10 unicorns were created each quarter. The current pace is now per quarter. Today, there are 267 identified unicorns. (Source: CrunchBase) Industry Count Percentage Advertising 4 1.5% Aerospace and Defense 3 1.1% Analytics 2 0.7% Artificial Intelligence 2 0.7% Auto 3 1.1% Construction 1 0.4% Consumer Internet % E-Commerce % Education 6 2.2% Energy 1 0.4% Enterprise 8 3.0% Enterprise SaaS 1 0.4% Entertainment % Fashion 1 0.4% Financial Services % FinTech 1 0.4% Food and Beverage 4 1.5% Hardware 9 3.4% Healthcare % Incubator 1 0.4% Local Business 1 0.4% Manufacturing 3 1.1% Nanotechnology 1 0.4% Real Estate 8 3.0% Security 5 1.9% Software % Transportation % Travel 3 1.1% Grand % Over 50% of today s unicorns reside in four industries: consumer internet, e-commerce, financial services, and software. Healthcare, entertainment, and transportation represent another 20% of the total level of unicorns. Whereas recurring revenue underlies the business model of many financial services and software ventures, consumer internet and e-commerce can be more volatile. Page 9

10 The Pace of Unicorns Has Accelerated Since Page 10

11 Most of Today s Unicorns Started in 2009 & After Financial Crisis The big question remains: how will the abundance of unicorns perform in a recession? The chart below from CrunchBase demonstrates the vast majority of unicorns have not experienced a deep recession or any recession whatsoever Page 11

12 Unicorn Trends: Winners and Losers While the creation of new unicorns has accelerated, exited unicorns still represent just 16% of the total level of both existing unicorns (267 total) and emerging unicorns (95 total). This 16% is derived from 59 exits out of 362 (267 current + 95 emerging). Is there a bottleneck in the future if IPO markets evaporate in the years to come? IPO exits have been either true homeruns or disastrous in post-ipo trading. The chart below from CrunchBase paints this hit or miss breakdown. Top Performer % Gain Since IPO Weak Performer % Loss Since IPO Shopify 629% Groupon -78% Facebook 410% NantHealth -74% Workday 410% Lending Club -73% Square 289% Sunrun -56% Wayfair 170% Blue Apron -53% Atlassian 153% Zynga -53% Twillio 141% Go Pro -48% Page 12

13 Business Model Challenges Don t Disappear Amidst IPO Hype Other notable investments have generated mixed performance. The post-ipo performance of these household names have been slightly positive to down. Top Performer % Gain Since IPO Weak Performer % Loss Since IPO Twitter 7% Vonage -31% FireEye 27% Snap -47% Pure Storage 12% MuleSoft -1% Main Idea: threats to business models don t simply disappear in a successful IPO or any IPO. Two notable examples for 2017 that prove this point: Snap and Blue Apron. The Blue Apron IPO in August 2017 arrived two months after the game-changing Amazon and Whole Foods acquisition. The market has not reacted favorably to the meal delivery company now facing the distribution and logistics challenges from Amazon / Whole Foods. Snapchat s story feature is under direct attack from Instagram and Facebook. Advertisers are showing they prefer permanent stories versus vanishing ones, which are the favorite medium for younger and loyal Snap users. Who will win out? Page 13

14 Enterprise Value to Total Capital Multiple: Proxy for Valuing Unicorns The implied Enterprise Value to Capital multiples, per CrunchBase, are as follows: Type of Company Exited Unicorns Existing Unicorns Emerging Unicorns Total Companies Total Valuation ($ Billions) Total Book Value Capital of Raised EV / TBVIC (Total Book Value of Invested Capital) $241.0 $920.8 $63.7 $35.3 $176.0 $ x 5.2 x 3.9 x Page 14 EV / TBVIC of 4.0 x

15 Enterprise Value to Total Capital Multiple: Proxy for Valuing Unicorns (Continued) The implied Enterprise Value to Capital multiples, per CrunchBase, for existing unicorns are as follows: EV / TBVIC of 4.0 x Page 15

16 Final Thoughts Facebook, Linkedin.com, and other successful unicorn stories are trading at 6 to 8 times EV / TBVIC. These firms have created tremendous value post-ipo and have demonstrated growth and market share expansion in the process. Most of this growth was post-ipo. This begs the question: how are select pre-ipo unicorns, many of which are facing business model challenges, valued at EV / TBVIC greater than 6.0 times when they are private and not as established? How are EV / TBVIC multiples over 6.0 times possible when aggregate data shows a 4.0 times EV / TBVIC range from CrunchBase for both existing and emerging unicorns? Valuation is driven by three leading valuation techniques such as the DCF method, M&A Method, and Guideline Company Method. Cash flow is king. The tech explosion in 2001 left hundreds of dot-gone stocks, many with no free cash flow, shattered. Price to Eyeballs, or any non-financial measure, raises flags. Industry rules of thumb, such as EV / TBVIC, should be taken with caution and used in conjunction with deeper analysis. Valuation method triangulation should help solidify a closer range. Private company discounts need to be scrutinized carefully. Make sure business valuator has a deep record and M&A experience in your industry. Page 16

17 17 Methodologies and Approaches to Unicorn Valuation Keith Smith Managing Director Empire Valuation Consultants

18 Consistent & Transparent Valuation of Unicorns - Update November 2, 2017 Keith D. Smith, CFA Managing Director ksmith@empireval.com Phone: Experience Excellence

19 Enterprise/Firm Valuation Approaches Income Use dependent upon maturity of Unicorn Discretely model cash flows Use market to benchmark assumption & exit values/multiples Chicago or VC Method Market (Third-party transactions) Implied values from historical transactions Need to assess strategic value if applicable Also need to include effects of securities with different right/preferences Option Pricing Method ( OPM ) Comparable Firm/Transaction (if available) Asset Are the asset worth more than the income generated?

20 Security Valuation Approaches (Waterfalls) PWERM (Scenario Analysis) Useful for defined exit events & timing Challenge is probability estimation of exit events Market based probability estimates for events situationally dependent Intuitive inputs that can be benchmarked Cross sectional studies useful in providing benchmarks OPM Useful for estimating relative value of securities Challenge in volatility, duration estimates and future financing needs Can use different models (Black-Scholes or Lattice) depending upon most important feature Monte Carlo can be used to capture unique features of securities Cross sectional studies useful in providing benchmarks

21 Challenges with Valuation Methods Fully diluted implied enterprise value Quickly calculated Does not recognized security value differences About right if every thing goes right (IPO) but overvalues in all other cases Multiples Has implied growth & margin assumption Option based Models Volatility Exit event Timing Future financing Scenario Models Event probabilities

22 Suggestions for More Robust Valuation Fact & Circumstance Based Model Selection Model selection based most accurate data available Amount & accuracy of benchmark data also important Accounting Guidance 2013 AICPA Valuation of Privately-Held Company Equity Securities Issued as Compensation AICPA Cheap Stock Practice Guide Multiple Approach If at least two approaches used enhances reliability Approaches can be weighted or one can be primary and one a reasonableness test More cross sectional studies to provide benchmarking data and analysis

23 Keith D. Smith, CFA Managing Director with Empire Valuation Consultants, LLC Earned an M.B.A. in Finance from the University of California, Los Angeles and a B.S. in Electrical Engineering from Union College Prior to joining Empire, Keith was a Manager in the Valuation Services practice of PricewaterhouseCoopers LLP in Los Angeles, a Senior Technical Analyst with Management Consulting & Research, and a Captain in the U.S. Air Force Chartered Financial Analyst (CFA) charter holder Mr. Smith s experience includes valuations of over 700 debt, equity and real estate related investments. These assets include direct debt and equity investments, complex capital structures (convertible preferred and common securities), leases, development receivables, real estate, RMBS & CMBS securities & whole loan pools. The purposes of the valuations included financial reporting, fair value marking, transactions and tax reporting. 15 years of experience in financial consulting and business valuation. He has valued the equity, debt, derivatives, liabilities, intangible assets, intellectual property and NOLs of publicly and privately held businesses for acquisitions, divestitures, estate & gift tax reporting, liquidation, financial reporting, and general corporate planning. Substantial experience valuing complex securities using Lattice and Monte Carlo simulation models, and strong experience valuing large high yield and non-performing loan portfolios consisting of commercial loans, hotels, development lot & land, and other commercial property.

24 Audience Q&A 24

25 Thank You! 25 u Participants will receive a copy of the slide deck and a recording of the Webinar tomorrow. u This Webinar is part of our VIVA program of fund valuation initiatives throughout 2017 more details can be found here: u The next event is our Webinar on Convertible Bond Pricing on November 9 th

26 26 Contact Us Voltaire Advisors LLP 14 Wall Street New York NY USA No.1 Poultry London EC2R 8JR UK