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I think when a model is presented like this, it should also show the examples where it fails. In the article, they show Square (Series E valuation at 6 B, pre-I
by arjie 9y ago
I think when a model is presented like this, it should also show the examples where it fails. In the article, they show Square (Series E valuation at 6 B, pre-IPO 2.66 B) where the "fair valuation" correctly models closer to pre-IPO at 2.2 B.
However, let's look at another example. Take Nutanix (Series E valuation at 2 B, pre-IPO at 2.1 B). This model values it at 0.8 B on their table, almost a third of the IPO price.
There is no explanation forthcoming in this article as to why that's the case. This makes it seem like the Square example was cherry-picked.
I picked NTNX at random, so I don't know if it's the one exception. I'm not going to exhaustively check every result, however. I expect them to do that for me and not sell me a story without pointing out the terrible exceptions.
- gjem97 9y agoThis is why the myth of "market capitalization" is so persistent. Often what you have at an IPO is a conversion of preferred shares to common shares. So effectively the 8 classes of preferred shares do become the same as the common, and the "simple" market capitalization number becomes real. However. How many startups never IPO? 99%? 99.9%? In acquisition or liquidation scenarios, those common shares are often worth a lot less than preferred. And because these scenarios make up a large proportion of the probability distribution, it means the expected value of common shares is a lot lower. Even unicorns that are far more likely to IPO can raise bridge rounds that cause major dilution for the common shares, rendering previous market capitalization numbers useless.