Monday Morning Memo

Another week, another MMM.

Recap of Last Week: Last week we discovered the teams that advanced out of Group A and Group B to the knockout stage of the Valuation World Cup.  We also had SmashFly as our Round of the Week!

What Lies Ahead: We will round out Group play and begin the knockout round in the Valuation World Cup as well as feature another ROTW!

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Round of the Week – SmashFly

 

“Total Recruitment Marketing” company SmashFly has just raised a $9M Series A led by OpenView Venture Partners. The funding will go towards accelerating growth and capitalizing on the shift in how companies acquire talent nowadays. SmashFly seems to have really exceeded their metrics with a 236% increase in sales year over year.  While they may not have a massive annual revenue base at this point (OpenView likes to invest in companies with $2-$20M in annual revenue), if we here at C:V. know anything about successful investments, SmashFly is definitely on the right path!

Name: SmashFly

Website: www.smashfly.com

Funding to Date: $9M ($9M Series A)

Deal Notables: Less on SmashFly and more on the lead investor….OpenView has a pretty unique model as far as VC firms go in that they have a specific charter as a firm (high-growth, scale-ready, B2B SaaS) but also have a dedicated group, OpenView Labs, that acts as an operational consultant to OpenView’s portfolio companies.  When a company with product-market-fit is looking to scale, we can only imagine how invaluable Labs must be in terms of providing structure and process to the company vision.  Needless to say, we are intrigued by the concept!  Learn more about Labs here!

P.S. Labs produces a weekly newsletter that is required reading here at C:V. so we highly recommend you sign up too!

Valuation World Cup: Group B – Winners Revealed!

*Editor’s Note: Keep up to date on all things Valuation World Cup here!

Group B – Major Upset, Major Metrics

And the first powerhouse is out! The Group of Death was too much for the Discounted Cash Flow method. But with the seeming favorite out, how did the other metrics play out?

EV/Sales and EV/EBITDA advance!

group b

Game 1: Enterprise Value/Sales 5-1  Discounted Cash Flow
Game 2: Enterprise Value/EBITDA  3-2  Enterprise Value/Sales Expense
Game 3: Enterprise Value/Sales Expense  2-0  Discounted Cash Flow
Game 4: Enterprise Value/EBITDA  2-2  Enterprise Value/Sales
Game 5: Discounted Cash Flow  0-3  Enterprise Value/EBITDA
Game 6: Enterprise Value/Sales  3-1  Enterprise Value/Sales Expense

Closest Match
With only one draw in the group, it’s evident that EV/Sales and EV/EBITDA are contenders at the top of their games. Both have the strength to go deep in the tournament… perhaps looking reminiscent of Brazil and Mexico in that other World Cup, especially if El Tri can keep getting performances like that out of Ochoa! But we digress. Let’s look at these metrics’ respective advantages:

For the EV/Sales multiple, it’s about simplicity. You can approach a company with negative cash flows and still capture the majority of the growth potential as an investor. It’s also much easier to project revenue than revenue and a full cost structure. Fewer variables to get wrong means a clearer picture of expected value. It’s like having one superstar who you can count on for at least a goal a game (re: Neymar, Messi).

EV/EBITDA takes a more complete approach to valuation, considering the cost of doing business which can vary significantly between even similar business models. It also doesn’t get bogged down in non-cash expenses or potential tax breaks, like the DCF or even the disqualified EV/Earnings. It’s like a long-lost love child of EV/Sales and EV/Sales Expense, à la Czechoslovakia, except this combo’s still kicking!

Biggest Blow Out
Discounted Cash Flow took an early walloping from EV/Sales, and was never the same. In our Group B preview, we compared the complexity of the DCF model to the Spanish tiki-taka futbol… little did we realize we had made two bold predictions in one! Realistically, the DCF was simply out of its element. Just think – precision passing and team-focused play led the Spurs to an NBA Championship but came up short for Spain in the World Cup.1 In this bracket, as in the Spaniard’s loss, simplicity is beautiful:

Memorable Moment
EV/Sales Expense thought their claim as the only measure that took into account the cost-per-sale metric might be defensible. But during their head-to-head with EV/EBITDA they looked about as lost as Mr. Yoshida trying to defend James Rodríguez

1Spain seems to be one of the only World Cup countries not represented on the Spurs’ 15-man roster: Argentina, Australia (twice), Brazil, France (twice), Italy, and the United States.

Valuation World Cup: Group A – Winners Revealed!

Here is the first Group play results!  Keep up to date on all things Valuation World Cup here!

The first group saw three teams tightly compete for the two knockout positions and one barely show up all of group play. The key to advancing out of Group A was a given method’s ability to recognize current trends in the market and its flexibility to capture those in the valuation.

Group A – 1. Adjusting the Average and 4. Recent Transactions Move On!

a table

Game 1: Cost-to-Duplicate  0-3  Adjusting the Average
Game 2: Recent Transactions  3-2  Build Up
Game 3: Adjusting the Average  2-1  Recent Transactions
Game 4: Build-Up  2-0  Cost-to-Duplicate
Game 5: Cost-to-Duplicate  0-2  Recent Transactions
Game 6: Build-Up  2-2  Adjusting the Average

Closest Match
With two of the six matches resulting in draws, this group was reasonably balanced. The match-up between Adjusting the Average and Build Up methods was certainly the most evenly matched, with both attempting to quantify intrinsic qualities of companies. It’s hard to say which method is better, since they both rely on subjective opinions of the companies to derive a hard numeric value.

Since this match-up failed to decide who would advance, it came down to their respective matches against Recent Transactions, the eventual group runner-up. Adjusting the Average matched the Recent Transactions in terms of relying on current market conditions to establish a base value. The Build Up method, despite its similar structure, had little flexibility for changes in market conditions without adjusting each block used to build a valuation.

Biggest Blow Out
Cost-to-Duplicate against Adjusting the Average
looked a little like the Swiss taking on the French: simply outmatched from the get-go. Cost-to-Duplicate’s real struggle was that it wasn’t grounded in current market expectations, but only looked to the “qualification games” and what it took to reach group play. This can result in severe undervaluation of promising early entries entering large markets – just the type of company a VC dreams about nightly!

Memorable Moment
On the last day of group play, Adjusting the Average recognized, and perfectly accounted for, a company’s ability to go to market without another round of funding. This ensured an undiluted return late in the second half as an equalizer against the Build Up method, which consequently led to Recent Transactions stealing the final advancing spot!

Monday Morning Memo

usoutlaws

We still believe! Tough draw last night but 538 still gives us a 76% chance to advance.  In other news, MMM below!

Recap of Last Week: Last week we continued our Valuation World Cup (OverviewGroup CGroup D) and SpotlightTMS was our Round of the Week!

What Lies Ahead: We will be finishing up group play this week in our Valuation World Cup and announcing the knockout round pairings.  Also expect a Round of the Week.  In other notes, we have moved away from a weekly VC spotlight and will now do them periodically as we find cool/fun people to feature!

Round of the Week – SpotlightTMS

SpotlightTMS is looking to become the box office for all corporate tickets and events.  Their $6M Series A will help them continue down that path.  Their software helps companies manage their ticket distribution and measures ROI on the events.  Pretty neat niche to disrupt if you ask us! (well, not really a niche seeing that it’s a $20B market…)

Name: SpotlightTMS

Website: http://www.spotlighttms.com/

Funding to Date: $8.5M ($2.5M Seed, $6M Series A)

Deal Notables: The company’s typical client spends about $3,350 a year to use Spotlight. But its largest clients are paying over $500,000 a year to manage their tickets and other assets through the Spotlight system.”  Those are some pretty far-ranging LCV’s if you ask us! We have a feeling they are all over their customer/business metrics but who knows, maybe the should check out our Valuation World Cup for some additional ideas (and you should too)!

Valuation World Cup: Group D – (Wildcard)

wildcard

Here is the final group, Group D, the rest of the rest.  This group is the wildcard group with entrants coming from all different areas and valuation methodologies.  It will be interesting to see how they match up against each other with their contrasting styles and formations.

Ownership %

Explanation and Use Case
The ownership % method is purely a math formula applied to the amount investors will own after a round has been raised.  This can be very common for early stage deals and the prevailing wisdom is that A round investors get about 30% of a company.  The idea behind this method is less about the company performance and more about the investor’s expected return and what ownership percentage is required to obtain that.

Pros and Cons
Ownership % main benefit is simplicity.  There are neither metrics (LCV, MAU) nor elaborate spreadsheets (DCF), there is simply a formula for pre money + investment = post money and whatever the investment % of the post money amount is the ownership.  Ownership % can be equated to differing formations on the pitch.  While any given team may have a 4-4-2 or a 4-2-3-1, they will always have 11 (10 + goalie) on the pitch to start the game.  It is simply a combination (formula) of where the players will line up.  The downfall of Ownership % is also its simplicity.  It doesn’t factor in any real relevant business metrics in the formula.

Example
CrashPad, an Airbnb competitor is raising its Series A round of funding of $2M.  Their investors have a requirement of 25% ownership of any company they invest in at A round.  Total Value: $8M

Acquisition Value (Attach Rate)

Explanation and Use Case
A lot of pundits have been questioning some of the prices of some of the mega acquisitions of recent (WhatsApp) and how the purchasing companies can justify the value.  The acquisition value (attach rate) method can be a great way to logically justify these prices.  This method takes into consideration not just the existing customer base and operations of the target company, but more importantly, how they would fit with the acquiring company’s business model and customer base.  For more information, see Marc Andreessen’s set of tweets on the topic.  This is similar to how a player with dual eligibility for two countries (re: John Brooks, Julian Green, etc.) can be seen in a different light by each country’s coach.  In the case of the German-American’s, they felt (and Jurgen helped persuade them) their value would be best realized on the USA squad rather than the German one and chose accordingly.

Pros and Cons
The attach rate method is a strong contender in this year’s pool because of its ability to take a holistic approach to valuing the company as an integrated piece of the existing company with synergies and economies of scale realized.  This can also be risky because if a company misjudges their attach rate or has issues integrating the acquired company into their processes and systems, the synergies expected may take longer to realize or even worse not materialize at all.

Example
CyberStop, an enterprise security software firm has a solid business of $100M in revenues and growing at 10% annually.  IT powerhouse F-P is looking to gain a foothold in the security space and feels it can bundle CyberStop’s product into 15% of its $50B in hardware sales a year.  Total Value: $7.5B

Enterprise Value/Patent

Explanation and Use Case
The EV/Patent multiple is a great way for companies with lots of IP or R&D and little to no revenue to find a rational way to determine their value.  In select industries, IP, Patents, and FDA approvals can be extremely valuable assets from their outset even if they do not generate revenue immediately.  These can be leading indicators of future revenue streams and as a result, early stage companies can use them as a proxy for value in the interim.

Pros and Cons
Patent approval can be a great thing; it can allow you to have full utility and control over the selected process or technology that you are developing allowing you to capitalize on the revenue opportunity when the product is fully developed.  The downfall of this is that just because you own the patent, you have no guarantee that the technology can be turned into a successful business.  Similar to how some countries fill their World Cup roster with young, unproven players in the hopes they can grow to become superstars, the patent to revenue life-cycle is not without its uncertainty.

Example
HealthKare Co has just patented a new method for a non-invasive flu remedy that has been valued at $2M.  It does not have any revenue yet but in comparing its offering to the space of similar company values, it determines that health care patents are valued at 10x.  Total Value: $20M

Exit Multiple

Explanation and Use Case
The exit multiple method is purely an investor based metric where investors require a certain return on investment and determine value based on money invested and the multiple expected.  Countries in the World Cup do the same thing with their coaches.  Coaches are hired (invested in) and have set expectations of what the goals are (milestones) and depending on how they perform will determine if the investment is successful.  If they win the World Cup when the goal was to simply put on a good performance it would be considered a fantastic investment, yet the opposite would be a disaster.

Pros and Cons
This is another method that relies on simplicity and subjectivity.  It can be a great gauge to help rationalize an investment opportunity similar to the market share/market size metric but the main downfall is that it is also not based on the business at hand, simply the investor’s required return.

Example
Refinery Group, a technology focused VC firm, would like to achieve 10x on their early stage investments.  They are considering investing in a SaaS HR solutions provider’s Series A with an expected exit value of $140M.  The company is looking to raise $4M.  Total Value: $10M

Matchup to Watch
Not so much a single match, but more a question if anyone can upset group favorite Acquisition Value (Attach Rate)?  They seem to have peaked at the right time with the perfect blend of leadership and disruptive product family in a space where many of the larger companies are looking to grow inorganically.