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One of the reasons that you hear CEO's want a $B valuation is that it becomes "easier to attract top talent". I'm not sure that is valid. You want talent that

by neelm 11y ago

One of the reasons that you hear CEO's want a $B valuation is that it becomes "easier to attract top talent". I'm not sure that is valid. You want talent that believes in your mission. Not all $B valued companies have the same risk/reward scenario. It'd be helpful to have some metric of the capital efficiency a company has to get to the $B mark. The one good side effect is that private investors are taking all of the risk. If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. It could however impact the LP market and the number/size of VC funds could go through another cycle.

myth_buster 11y ago
If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. Isn't this only in the case where the said unicorn is not IPO'd. Like in the case with Groupon which lost 85% of it's value since IPO, the public market is affected. If these 59 unicorns go public and begin to loose money, they would effectively trigger a domino I believe. Like the VCs who get in during the E/F rounds, the general public is also susceptible to similar behavior.
- neelm 11y ago
  Yes that is true. You're exposing an assumption of mine which is that many of these companies will not necessarily IPO. However even when they do, they will be a lot more operating history and financial information than what companies typically had in 2000. This is why you're seeing some recent tech IPOs that went public at a valuation lower than their last private round. An example of this is Hortonworks.
  - myth_buster 11y ago
    I hope this becomes the norm but I'm a bit wary as IPO conversion provisions [0] may come into play. [0] https://www.fenwick.com/publications/pages/the-terms-behind-the-unicorn-valuations.aspx https://www.fenwick.com/publications/pages/the-terms-behind-...
bryanlarsen 11y ago
Top talent wants a low valuation so that stock options can provide a big payout.
- beambot 11y ago
  Plus: Anyone who is "top talent" is probably well aware of the negative effect of liquidation preferences on employee common stock value in an acquisition (the topic of the article). So $1B valuations with heavy liquidation preferences are not a good thing to these folks.
  - aqme28 11y ago
    However liquidation preferences are opaque to candidates, so "top talent" just has to assume there are liquidation preferences on all companies.
    - beambot 11y ago
      Those terms are very material to a candidate's compensation package; maybe they should be made known. (Honesty and transparency?!)
- flog 11y ago
  So should this mean talent should be discounting equity when negotiating deals with still-private companies? If so, how much?
  - neelm 11y ago
    Yes. Not always easy to answer. Some factor of revenue growth, margins, how much capital the company has already raised, understanding the burn rate, how much has been spent vs dry powder, liquidation preferences assumption. Probably a lot I'm missing. There should be an easier way for a prospect to simulate a cap table with a simple set of assumptions.
  - avn2109 11y ago
    A good first approximation is to regard your after-tax equity upside == 0 in all ventures that you didn't found.
w4 11y ago
> The one good side effect is that private investors are taking all of the risk. If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. I'm not so confident about this. One of the reasons the 2000 correction was so dramatic was how interconnected tech revenues had become. Startup A had revenue because startups B and C were customers. When B went under, A started to have trouble. Then A goes under, so C loses their customers who were being paid by A, and so on. Revenues were basically a shell game funded by VCs. This pattern looks like it's repeating itself. Look at public companies like Facebook and Twitter: huge portions of their ad revenues come from app install ads. It's safe to assume that a lot of those ad buys wouldn't be happening without VC funding. How about IaaS/PaaS providers? Same story. There will still be customers for many of these products if the bubble pops, but how well can these companies handle a rapid reduction in demand? And then there are ripple effects. How will commercial REITs fare? How will consumer spending be effected when people currently earning inflated salaries paid for by VC money suddenly can't find a job? At this point it's all one big hypothetical, but I would hesitate to assume that a correction will be limited to the private market. The public market has plenty of exposure to the private bubble by proxy.
- shostack 11y ago
  Source? A lot of app install ads are from companies with solid revenue streams that are not startups. A lot are also for mobile games monetizing (oftentimes quite profitably) off IAP. I feel like there is a common claim floating around that a lot of the big tech companies in the advertising industry (Google, FB, Twitter, etc.) are going to take a huge hit if something causes funding to dry up for startups. I have yet to see anything material indicating that a notable portion of their ad revenue is driven by such companies. Are these companies spending with them? Sure. But in terms of absolute dollars and total % of revenue, my assumption would be it is a drop in the bucket compared to large established brands like CPG companies, clothing companies, auto companies, etc.
- BraveNewCurency 11y ago
  I might agree about ads, but not IaaS. Let's say a company gets $10M in funding. It's hard to see how it can spend more than $100K/year on IaaS. On the other hand, there are plenty of blue-chip companies spending $millions on IaaS. (i.e. Try to do drug research without it.) And even if all VC money went away, for every VC funded company, there are 100 startups using 1/100th of IaaS.

by neelm 11y ago

myth_buster 11y ago

If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. Isn't this only in the case where the said unicorn is not IPO'd. Like in the case with Groupon which lost 85% of it's value since IPO, the public market is affected. If these 59 unicorns go public and begin to loose money, they would effectively trigger a domino I believe. Like the VCs who get in during the E/F rounds, the general public is also susceptible to similar behavior.

neelm 11y ago
Yes that is true. You're exposing an assumption of mine which is that many of these companies will not necessarily IPO. However even when they do, they will be a lot more operating history and financial information than what companies typically had in 2000. This is why you're seeing some recent tech IPOs that went public at a valuation lower than their last private round. An example of this is Hortonworks.
- myth_buster 11y ago
  I hope this becomes the norm but I'm a bit wary as IPO conversion provisions [0] may come into play. [0] https://www.fenwick.com/publications/pages/the-terms-behind-the-unicorn-valuations.aspx https://www.fenwick.com/publications/pages/the-terms-behind-...

bryanlarsen 11y ago

Top talent wants a low valuation so that stock options can provide a big payout.

beambot 11y ago
Plus: Anyone who is "top talent" is probably well aware of the negative effect of liquidation preferences on employee common stock value in an acquisition (the topic of the article). So $1B valuations with heavy liquidation preferences are not a good thing to these folks.
- aqme28 11y ago
  However liquidation preferences are opaque to candidates, so "top talent" just has to assume there are liquidation preferences on all companies.
  - beambot 11y ago
    Those terms are very material to a candidate's compensation package; maybe they should be made known. (Honesty and transparency?!)
flog 11y ago
So should this mean talent should be discounting equity when negotiating deals with still-private companies? If so, how much?
- neelm 11y ago
  Yes. Not always easy to answer. Some factor of revenue growth, margins, how much capital the company has already raised, understanding the burn rate, how much has been spent vs dry powder, liquidation preferences assumption. Probably a lot I'm missing. There should be an easier way for a prospect to simulate a cap table with a simple set of assumptions.
- avn2109 11y ago
  A good first approximation is to regard your after-tax equity upside == 0 in all ventures that you didn't found.

w4 11y ago

> The one good side effect is that private investors are taking all of the risk. If there is an adjustment in valuations across the industry, it should not effect the public markets the way it did in 2000. I'm not so confident about this. One of the reasons the 2000 correction was so dramatic was how interconnected tech revenues had become. Startup A had revenue because startups B and C were customers. When B went under, A started to have trouble. Then A goes under, so C loses their customers who were being paid by A, and so on. Revenues were basically a shell game funded by VCs. This pattern looks like it's repeating itself. Look at public companies like Facebook and Twitter: huge portions of their ad revenues come from app install ads. It's safe to assume that a lot of those ad buys wouldn't be happening without VC funding. How about IaaS/PaaS providers? Same story. There will still be customers for many of these products if the bubble pops, but how well can these companies handle a rapid reduction in demand? And then there are ripple effects. How will commercial REITs fare? How will consumer spending be effected when people currently earning inflated salaries paid for by VC money suddenly can't find a job? At this point it's all one big hypothetical, but I would hesitate to assume that a correction will be limited to the private market. The public market has plenty of exposure to the private bubble by proxy.

shostack 11y ago
Source? A lot of app install ads are from companies with solid revenue streams that are not startups. A lot are also for mobile games monetizing (oftentimes quite profitably) off IAP. I feel like there is a common claim floating around that a lot of the big tech companies in the advertising industry (Google, FB, Twitter, etc.) are going to take a huge hit if something causes funding to dry up for startups. I have yet to see anything material indicating that a notable portion of their ad revenue is driven by such companies. Are these companies spending with them? Sure. But in terms of absolute dollars and total % of revenue, my assumption would be it is a drop in the bucket compared to large established brands like CPG companies, clothing companies, auto companies, etc.
BraveNewCurency 11y ago
I might agree about ads, but not IaaS. Let's say a company gets $10M in funding. It's hard to see how it can spend more than $100K/year on IaaS. On the other hand, there are plenty of blue-chip companies spending $millions on IaaS. (i.e. Try to do drug research without it.) And even if all VC money went away, for every VC funded company, there are 100 startups using 1/100th of IaaS.