To know what you’re going to draw, you have to begin drawing.
– Pablo Picasso
Picasso was a prolific genius and one of his tricks was to remember that the act of starting to draw got him started on the path of building the vision for his creation.
This trick stands for most any task. The act of getting started is very powerful in beating procrastination and getting things done.
A simple message to take into the weekend.
This chart (which I saw on Broadstuff and was originally published in the Harvard Business Review) is from audited company accounts following mergers and acquisitions:
…we looked at the value of brands and customer relationships as revealed by M&A data covering over 6,000 mergers and acquisitions worldwide between 2003 and 2013. The beauty of M&A for examining valuation trends is that M&As reveal the dollar valuations of all assets at the time of the acquisition. Upon acquiring a business, companies have to value the different assets they acquired for their accounts and balance sheet in accordance with accounting and reporting standards. These valuations include – among other assets – brands (trademarks) and customer relationships.
I read this as affirmation of a trend that we’ve talked about a lot here on The Equity Kicker – the rising importance of product quality (defined to include all customer touchpoints, including customer service) and the corresponding decline in the importance of brand. It’s pretty stark – brand value as a percentage of enterprise value fell by nearly half in the ten years from 2003 to 2013. This chart shows the beneficiary as customer value rather than product value, but product quality drives customer value in two ways:
- lower customer acquisition costs – great product drives word of mouth marketing (which is why companies now obsess over NPS)
- higher repeat purchase rates – customers remember great product experiences and want to repeat them
Social media has been the big driver of word of mouth marketing and it’s no coincidence that this chart starts around the time Facebook was founded in 2004.
Jeff Dachis made a similar point on Techcrunch today in a post about the problems with traditional marketing software when he says we are now:
in a world where pre-purchase consideration is no longer driven by reach and frequency, but by excellent consumer experiences, advocacy and amplification across every touchpoint seamlessly
Mattermark just released their report on Q1 2015 venture activity in the US (download here). As you can see activity is up across the board but it is only late stage venture that has seen a massive jump. This picture is consistent with what I’ve been seeing and reading generally – if there is a bubble, and I now think there may well be, then it is confined to late stage investments. Activity is heady in the Seed through to Series C sections of the market but year-on-year growth rates in investment of 19-47% aren’t in bubble territory.
The interesting question is: where do we go from here?
I think we will either see a correction in late stage investment or the mania will spread down to the earlier stages. Or, more accurately, the late stage mania will continue it’s trickle down to the earlier stages until we either get a late stage correction or we are in a cross-stage bubble.
Corrections are typically stimulated by events – the last time we had a late stage bubble troubles at Groupon and Facebook’s poor share price performance immediately post-IPO took the heat out of the market. Following that logic, this time round I think the market will keep getting hotter until we see trouble at 2-3 of the leading unicorns – Uber ($40bn valuation), Snapchat ($15bn), SpaceX ($12bn), Pinterest ($11bn), Airbnb ($10bn), and Dropbox ($10bn).
Reading this front page of the Financial Times this morning made me feel great about the future for startups. Innovation is happening faster and faster yet big groups are reining in capex and distributing $1tn to shareholders in the US alone. The only way to read this is as a tacit admission that they can no longer live with the pace of change. Moreover, even when the management of these companies get it they are often hamstrung by shareholders who are overly focused on the short term.
Startups will benefit in two ways:
- More opportunities to disrupt big groups and build massive new businesses
- More M&A as companies replace internal innovation with acquisitions – this will run from acqui-hires up to multi-billion dollar deals
We’ve just been writing an update for investors about the progress our partner companies have been making. A few of them have done good up rounds and the easiest way to describe the magnitude is to talk about the valuation multiple.
From the perspective of existing investors the right way to calculate the valuation multiple is to compare the pre-money valuation of the new round with the post-money valuation of the last round, which is the same as the increase in share price. (As a refresher, the post-money valuation is calculated as the pre-money valuation plus the amount of money invested.)
Investors and entrepreneurs alike want to present the progress in the best light by showing the biggest multiple they can and they often default to comparing the post-money valuation of the new round with the post-money valuation of the last round. At first glance that seems to be a fair representation of how far things have moved forward, but it doesn’t account for the impact of the new money.
This is best explained with a fictitious example.
- ACME Hot Food co first raises a round of £2m at £6m pre-money and hence £8m post-money
- Twelve months later the company raises a further £8m at £8m pre-money and hence £16m post-money
- The share price and valuation of the company hasn’t moved forwards because the new investor valued the company at £8m, the same as the post-money valuation of the previous round – the share price won’t have changed
- Comparing the pre-money valuation of the new round with post-money valuation of the old round shows this clearly – £8m to £8m – ACME Hot Food co has achieved something in raising more money, but there has been no uplift in valuation
- However, comparing the post-money of the new round with the post-money of the old round gives the illusion that the valuation has doubled – £8m to £16m
Note: if the option pool has been increased between rounds this will have the effect of reducing the increase in share price and should be factored into the analysis.