How do you value unicorns
I just got placed on a project where I am asked to find some way to value unicorns, specifically find some connection quantitatively why some Unicorns do better than others when they IPO.
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Not necessarily the easiest of tasks my man. I got some of this from an M&I video (titled : how are startups worth billions) but if you are looking at a software/subscription based company you should try and see the growth rate in terms of customer-base/downloads. A rapidly expanding company that quickly shot up in users are prime targets for high valuations because if a company continues to grow at high rates, the customer base will also grow increasing revenue. Not really sure what else you can look at besides the customer base, downloads, and other metrics like that. Give the video a shot (can't post a link since Im a new member)
Do you have any financials on the business? Those would help a little. VC valuation really boils down to an estimation of broader market forces, a little bit of pattern recognition in terms of how other related business' are doing, and trying to predict user growth and the LTV of the customers.
http://aswathdamodaran.blogspot.com/2014/12/up-up-and-away-crowd-valuat…
Here's Damodaran's breakdown of the uber valuation from a few years ago. Should be about as technical as this type of valuation could get.
When it come down to it, throw a few rough numbers out there and back it up by assuming $$ amounts for user growth and the LTVs of the customers, and then get into the softer stuff saying that the ability of the unicorn to revolutionize the space it operates in, plus the frothiness of the tech market are what lead to such a high valuation. Boom assignment done.
"How Do You Value Unicorns" is an odd way of framing the question to me as being a unicorn is a function of the valuation process, not something inherent. But, that's semantics.
I think your project is essentially asking two things:
i) Why do some companies get valued at over a $billion versus their peers, what metrics are used to attain these valuations.
In basic terms, ceteris paribus, if a company is usually valued as the sum of all future cash flows discounted to present day value then strong current cash flows or the ability to produce these in the future will give you a proportionally higher valuation.
The inference of the question here is that a lot of these companies do not have strong current cash flows, nor, evidence would suggest, the ability to produce them any time in the near future (calling into question the usefulness of some of the metrics applied (clicks; views; downloads etc.).
ii) Why do these 'unicorns' perform differently at, or soon after, IPO.
As there isn't a solid consensus on i) the metrics to use ii) the ability of these companies to generate cash in a traditional sense it becomes a lot more focused on telling the story of a stock.
A lot of unicorns that hold their value well do so because they have i) high user engagement ii) the ability to become a platform (SnapChat is a good example of this) iii) they are defining a nascent market and have established themselves as leaders.
Equity market characteristics at the time of IPO are obviously important. Look at geographic breakdown of Unicorns to see how welcoming different markets are of these types of companies.
If you can find some initiating coverage reports for any Unicorns that you're thinking of using in your example that would be good. I'd expect you to almost certainly see Multiples / Comparables (pay attention to metrics) and a DCF with a myriad of warnings about assumptions.
Think about the actual process of how this happens. Bankers get their story together, put some numbers together and go and walk it around town, they will often try and find some anchor investors so they (should) have an idea of where a stock can be priced based on indicated demand.
The Damodaran suggestion is a good one.
In terms of equity market characteristics and geographic breakdown, please elaborate what to search and what to be looking for.
I will be using Box as an example. Please explain in terms of Box.
You use an option pricing approach where you model the company's current capital structure and induce the implied value of total equity by backsolving to the latest financing round through a distribution waterfall.
Hope this helps.
Non comprehensive, very high level thoughts IMO:
Look at unit economics of the unicorn, have they remained the same, deteriorated or improved with scale. This should tell you something about the long term viability of the business to preform profitably once it shuts off the majority of the growth engine that is causing such high negative earnings. Another key is the trended historicals and projections of the LTV / CAC (different based on unicorn)
Also look at what the valuation the company is looking for now, how much equity they want from you now and in the future and determine the probability of hitting a return outcome your firm requires.
Determine if that risk of not hitting that probability works with your firms underwriting appetite.
Optimal LTV/CAC should be higher than 3.
How do I get the numbers I need to calculate LTV / CAC historically and in the future?
How do I get the numbers I need to calculate LTV / CAC historically and in the future?
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