I got into a Twitter debate with Marc Andreesen of Netscape (the inventor of the commercial web browser) and Andreesen Horowitz (the VC fund that financed Facebook, Twitter, Skype & Zynga) fame.
He spit out what was mostly common sense, yet still flew in the face of what is taught in school, most text books and by most B school teachers. Here's how it went down, first ten tweets are from Marc, the rest are from me or my followers...
1/A few common fallacies about valuation of public and private technology companies:— Marc Andreessen (@pmarca) April 17, 2014
2/First, ask any MBA how to value tech companies, she'll say "discounted cash flow, just like any other company": http://t.co/xbvruoYB0Z— Marc Andreessen (@pmarca) April 17, 2014
3/Problem: For new & rapidly growing tech co's, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.— Marc Andreessen (@pmarca) April 17, 2014
4/You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions.— Marc Andreessen (@pmarca) April 17, 2014
5/Related to fact that tech co's don't have stable products like soup or brick companies; future cash flows will come from future products.— Marc Andreessen (@pmarca) April 17, 2014
6/Instead, smart tech investor thinks about: A future product roadmap/opp'y, B bottoms-up market size & growth, C talent and skill of team.— Marc Andreessen (@pmarca) April 17, 2014
7/Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen.— Marc Andreessen (@pmarca) April 17, 2014
8/Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous.— Marc Andreessen (@pmarca) April 17, 2014
9/Doesn't mean cash flow doesn't matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash.— Marc Andreessen (@pmarca) April 17, 2014
10/Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow--lagging not leading indicator.— Marc Andreessen (@pmarca) April 17, 2014
Here's where I chimed in and started spilling the VC secret sauce beans.
RT @pmarca: "common fallacies in valuation of private tech companies" media falsely assume preferred & common valuations are comparable. NOT— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca on false assumptions re: tech co. Valuations, startup that got a $8m premoney prefd would have gotten $2m val if done in common— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
When entrepeneurs get all happy because they're recieving what thier VC said was an $8 million valuation for their Series A found, of which they're giving up 20% for $1.6M (gross expenses), they are naively comparing this to the dollars recieved in a common stock financing. This is fallacious. The control premiums, dividend claims and liquidation preferences often built into the preferred offerings really bring the economic valuation way down. If anyone doesn't believe me, ask their VC to take common founders stock instead of preferred on VC steroids at the quoted valuation. Get back to me with those answers, I'll sit here and wait.
Selling overpriced, negative real rate, Fed pumped up paper certificates in liue of cold hard cash basically does the same "price inflation thing" in the public markets. Now I know Marc invested in Facebook and made a ton of money, but the valuation that FB went to market at was simply a joke, see my mucho analytical rants - To wit:
pre-IPO - Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
at the IPO - The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1 as well as The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
and post-IPO - On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available... as well as...
- Is Time For Facebook Investors To Literally Face the Book (Value)?
- Facebook Bubble Blowing Justification Exercises Commence Today
- Facebook Options Are Now Trading, Or At Least The PUTS Are!
Now, that I've established how overvalued FB was (and how much money Marc made for his LPs), take a look at how much money FB really pays for a company like Whatsapp when it says it pays $19B...
I wrote on my blog... The Man Who Correctly Anticipated Facebook's IPO Value Knows Why Whatsapp Was Purchased
RT @pmarca: "For new & rapidly growing tech co's, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses." True— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca a other big problem with DCF is its difficult to measure reinvestment vs actual expense early on & tends to mischaracterize both— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
So many people can't differentiate the difference between what amounts to a structural cost, or effectively a disguised fixed expense (like what is now much of Apple's marketing and sales expense) and true business investment and reinvestment (which is what you have seen in Google with YouTube, Android, Grand Central, Glass, Driverless cars, Fiber, balloons and drones). The academic use of DCF simply exacerbates this problem by compounding the smeared differences.
@pmarca pay $19b in Federal Reserve Notes (USD) for my startup and I'll gladly walk you through it (devious chuckle in the background d) :-)— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca I'm strong believer in spreadsheet investing, but you need reliable numbers input in models & those don't exist in tech startups— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
Garbage in, garbage out! No?
And this goes back to that MBA education thing. Here's some more on the topic...
15/Which goes right back to the start: Who are the people, what are the products, and how big is the market. That's the formula.
— Marc Andreessen (@pmarca) April 17, 2014
This debate all stemmed from my due diligence in deciding whether to approach venture capital firms for my UltraCoin "smart contract" startup. Since I plan to disintermediate the banking system, wholesale, I thought I better get some additional capital lined up.
That is a story in and of itself. I went to the crowdsourcing and Bitcoin community, and they really weren't feeling me. I then turned to my natural constituency, clients from my blog and of course we found Nirvana.
The board and the team that I'm building is outrageous, and I'm quite tempted to spill the beans right here. Alas, it's not quite time yet. As Marc said, its about... Who are the people, what are the products, and how big is the market. Well here 'ya go.
The Financial Nostradamus, serial enterpeneurial investor who's called nearly every major boom and bust in finance and technology over the past 8 years.
Contract and IP attorneys (all in one person) with over 15 years experience doing both!
My team of financial analysts whom I've worked with for 7 years,
The product - outrageous ZeroTrust, no counterparty risk, no credit risk, peer to peer financial asset trading with near real time settlement.
A board of advisors containing some of the most successful people in politics, finance and technology!!!
And how big is the market? Well...
For those who feel they have financial or intellectual capital to contribute to the cause, I'm still looking... Click here to learn more.