Evaluation of Risks & Rewards
Is Uber worthy of the $62.5 billion price tag?
The entire venture capital community - incubators, VCS, business angels, and others - are convinced that of the socalled Unicorns, Uber’s valuation is perhaps, too lofty. This is, if Uber’s strikingly high valuation is viewed traditionally. For anyone outside of the venture capital community, it’s difficult to make a logical argument, since they’re not privy to inside information about the company, or its plans for growth.
The meteoric rise of Uber and other Unicorns, valued at a billion dollars or more, is skeptical. But, does it matter?
Uber is changing the way the world moves. It’s even more impressive if you consider that fact that five years ago it was limited to San Francisco. Today, it offers rides in more than 65 countries, and its monthly figures have been accelerating over time. But again, not every Unicorn is capable of projecting an endless upward trajectory, even when it looks like a sure thing. These companies represent a new trend in the types of business
that investors prefer. For a company founded five years ago that’s worth $5 billion, for example, has greater time to market capitalization than a company founded ten years ago that’s worth $8 billion. In other words, today’s start-ups are growing about twice as much fast as those founded almost a decade ago. And they’re startups are earning highly volatile valuation than those of the 1990s. Analysts and venture capitalists suggest this reflects a bubble. In fact, investors are overpaying for equity in Unicorns,
and thereby inflating their market capitalization.
According to a report published in the Financial Times, in November 2015, Fidelity Investments had written down its stake in Snapchat valued at $15 billion during its last fund-raising round by upto 25 percent. It was during the same month that mobile payments company, Square filed for an IPO at a price range that could possibly put the firm’s worth much beneath its private valuation, which was at $6 billion in 2014.
The only possible explanation for such a volatile growth is the fundamental forces at work behind it. Take for example, products and services, which are getting discovered and adopted at a greater speed than ever before. Word of mouth does the trick, such that you can see a company get overnight success. Twitter, Tumblr, Facebook, Pinterest, these all got adopted fast through the most effective means of marketing - word of mouth. Moreover, the ubiquity of smartphones and similar technology has opened the flood gates to a rare opportunity never seen before - to rapidly distribute software for these technologies.
In order to grow their companies quickly, startups are trying to raise as much capital as possible. This gives them greater flexibility, and even more power to fight off rivals from the industry.
CANARIES IN THE GOLD MINE
Research suggests that in Silicon Valley, the amount raised ultimately matters. Of the 70 companies that raised funding since 2000 and have gone public, there was no long-term value creation between the amount raised to the IPO predicted growth in the market capitalization after the IPO.
So, if the amount raised doesn’t actually predict longterm valuation creation, then what does? Studies show that there is an interesting correlation. Companies that go public between the ages of 6 and 10 years, generate about 95 percent of all the value created after the IPO.
Today’s companies are not just willing to get big faster, but they’re also willing to stay
private for as long as it matters. In that case, it is not clear how the link between the company age and the growth in market capitalization works out. Do the strongest companies go public around the same time? Is there a correlation between companies that go public early and very late that hinders their ability to create post-ipo market capitalization?
So, if the amount raised doesn’t actually predict long- term valuation creation, then what does? Studies show that there is an interesting correlation. Companies that go public between the ages of 6 and 10 years, generate about 95 percent of all the value created after the IPO.
Post-2014, startups are in no rush to go public. Rather, they prefer getting preferential treatment from hedge funds, corporate VC firms, and mutual funds. So, if a Unicorn remains private much through its growth phase, chances are it may never see a successful IPO. In many cases, we’ve seen investors pushing companies to go public, sooner, to cash in on the returns. Take for example, the privately-held company Jawbone, which was founded in 1999, and was once seen as a market leader in wearable devices. Today, it no longer ranks among the top five vendors in the wearable market, and its market share has seen a steep decline. In November last year, it announced it was laying off 15% of its staff.
Researchers hint that a vast majority of post-ipo valuation creation comes from companies in the socalled premium category - see, Facebook, Tableau, and Linkedin. All of these companies have captured more than 70 percent of the market in their particular category. For today’s startups, simply racing to the finish line to define new product categories is the real win. For them, simply raising substantial venture funding isn’t enough, and certainly not going public too soon or too late than the defined limit.
Billion dollar valuations are becoming less rare. According to Thewall Streetjournal, in 19992000, there were 18 private, venture-capital backed companies in the U.S. valued at a billion dollars or more. Today, there are more than 70 in the United States, and a dozen another in other parts of the world. Critics, certainly have the right to point out that mega-valued startups should signal an alarm. However, a billion dollars really isn’t what it used to be.
The definition has in fact gradually changed. Take Uber for example, its model for delivering transportation is set to increase the size of the livery globally. Its valuation may seem humungous to the massive role in the market it plays in, however investors are more interested in how big the service can become in terms of global transportation. In the end, everything comes down to newer technologies and competencies. When companies invest to make premium-quality goods and services cheaper and more accessible, it makes it even more possible for them to capture the market. When companies invest to build, owe and manage their assets. The bigger the savings for the consumer, the bigger their chances of hitting disruption. A decade ago, an on-demand car service would have looked like lunacy, owing to the fact that we were experiencing a global economic meltdown. Today, the companies who invested to make such services are reaping the benefits.
Of course, these companies run into a fair share of risks. Ranging from regulatory issues to safety issues, to public relations problems, some of these billion dollar babies have a long way to go. But, when you look at them through the lens of disruption, it’s actually much easier to grasp how much more worth they could possibly be than they are. This just shows how market forces can greatly affect the value of a company.
The bottom line: begin your evolution today. Activate your networks by reaching out to your customers, employees, partners, suppliers, employees, and investors and figure out how you can cocreate value with them.