VC by the Numbers discussed “Triple Crowns” and why these make for the best investments as compared to “unicorns”. In this blog (and in my book) I argue unicorns are overrated on a regular basis.

What are “Triple Crowns” ? From Unicorns are overrated, Triple Crowns are Better:  These are the financing that met these three conditions:

1.”Realized a cash-on-cash multiple of at least 10X, and
2. Realized an IRR of at least 100%, and
3. VCs invested at least $1M. “

Correlation Ventures studies have shown that while unicorns make up some 3% of ventures financings since 2006, triple crowns make up only 2%. CV’s David Coats expresses his belief that the focus on unicorns and later stage-greater need for financing is an unhealthy trend for the VC industry.

How are you training for 2019 ?

Since we’re still at the beginning of the year, are you implementing anything new and exciting in your workout ?

A buddy of mine talked to me about Spartan SGX or Spartan Strong Classes and told me to try it out. Here is the link for those type of classes. (these are 90-minutes long)

Winter[fell] is here in 2019

In 2017, I wrote a best-read post on the Season 7 of the Game of Thrones. The expectations are high for this year’s final season. Let’s remember:

“The common shares are overvalued by 58 percent on average, and for almost half of unicorns “fair valuation” dips below the billion-dollar threshold.”

“Whether or not we will see a crash on anything like the scale of the bursting of the Dot Com bubble is similarly difficult to say with certainty, depending as it does on which dominoes fall first and how hard investor confidence is hit. But suffice it to say, there will be some major casualties.” -IS

Reference: Gornall, Will and Strebulaev, Ilya A., Squaring Venture Capital Valuations with Reality (February 27, 2018). Stanford University Graduate School of Business Research Paper No. 17-29. Available at SSRN.

Quote of the day: “You never know what is enough unless you know what is more than enough.”-William Blake

In response, Scott Kupor of A16Z published a rebuttal outlining valuation methods used in the industry. Kupor differentiates between the “marks” (quarterly snapshot of realized and unrealized gains ) from the actual cash and stock distibutions (which constitute the returns). Generally speaking, VCs require companies to get an independent 409A FMV valuation. A 409(A) Primer is available at Axiom Valuation. Accordingly the methods used to value investments are:

1. Last Round Valuation Waterfall.
2. Comparable Company Analysis. For example, if a portfolio company is generating $100 million of revenue and its “comparable” set of companies are valued in the public markets at 5x revenue, a venture firm would then value the company at $500 million ($100 million*5x) “. A  firm will then also apply what’s known as a DLOM (a discount for lack of marketability) to reduce the carrying value of the company described as often 20-30%.
3. Option Pricing Model. OPM uses Black-Scholes to value a portfolio company as a set of “call options  whose strike prices are the different valuation points at which employee options and preferred shares all convert into common stock.” Kupor points out Black-Scholes is the method his firm widely uses. If a firm has raised Series C at $5.00/share, OPM using Black-Scholes will assign a value to the Series A and B that is a substantial discount to the $5 per share price assigned to the Series C. Adding those up gives the company value. ” (Kupor).  The strike price of an option here corresponds to the other(s) equity values reached (but it could have been the liquidation preferences on each preferred series). Calculate the incremental value of each option based on the option’s strike prices. Of course the common class participation percentage would be multiplied by the incremental value of the call options, them sum them all up.
   

             To those three¹ we could add:
         4. VC Method (needed: exit price estimation).
         5. Risk adjusted NPV -ex.:pharma licensing valuation at Torreya Partners.

On the trails of A16Z post. Marck Suster of Upfront Ventures points out the uncertainty of the outcome for funds that generally make it out great, but may yet have a trailing fund.  IRR may be the method used to gauge investments but the money returned to investors can only be the cash on cash (realized returns).

We’ve seen the largest players in private equity (KKR)making a play for the Venture Capital class attracted to potential outsize returns. KKR recently invested in Ping, AcuFocus, Darktrace and others.
Will that ultimately pay off ?

Four #termsheet #provisions that protect #VC interests https://t.co/NxsAXOmMm2 via @PitchBook #venturecapital basics #funding #startups pic.twitter.com/u4jiWthjmn

— Financier Guru (@FinancierGuru) October 20, 2016

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