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Redfin: Path to IPO

ValuationIPORedfinInvestorStartupsVenture capital
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Charlie Joyce   July 20, 2017

Redfin, the Seattle-based real estate brokerage aiming to reshape the industry, recently priced its upcoming IPO between $12 - $14 per share. At this valuation, Redfin would become the latest tech unicorn on the public market. As the company heads towards its public listing, one big question lingers for investors: Should Redfin be valued as a real estate brokerage or as a tech company?



Q&A: Dave McClure of 500 Startups on the State of Private Markets

ValuationInvestorStartupsSecondary MarketIPOPre-IPO
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Atish Davda   April 20, 2016

Looking back at the first quarter of 2016, the public equity markets have been defined by a fair amount of volatility, and have followed a “V” shape, ending the quarter close to the levels at which is started.  At the same time, mid-stage private technology companies are focusing on “revenue and profitability” instead of just “growth and capital raising”. Amidst all of the reasonable caution, there is opportunity.
S&P500 through March 2016, source: Google Finance

In order to investigate these recent market trends, and in order to try and understand what may lie ahead, EquityZen is starting a series of interviews with informed professionals in the private, venture-backed industry.
Since EquityZen is a proud member of the 500 Startups family, it felt fitting to begin the series with 500 Startups founder, and self-proclaimed geek, Dave McClure.  500 Startups has invested in over 1,500 companies across 50+ industries, including many household names like Twilio, Credit Karma, and Udemy. Prior to founding 500 Startups, Dave managed early-stage investments for Founders Fund, led the Facebook fbFund and was as a member of the PayPal mafia.

Dave McClure, #500Strong

Without further ado, here is a summary of my interview with Dave:

Atish M Davda: How has the funding environment changed in the last 12 months for companies?
Dave McClure: Most of the changes in the past 12 months have actually happened in the last 3-4 months. Investments in later stage companies have come down, especially Series B and Series C companies that jumped up in valuation.  Non-traditional venture investors, such as public funds and corporate investors, wanted to get exposure to this part of the investment universe and began paying up for it.  We’re now seeing them mark their books down as they would public companies.

AMD: How big are the markdowns that you’re seeing on the private side?
DMC: Early stage valuations have come down around 20%. Late stage companies are being marked down by around 30%.

AMD: What advice would you share with investors that may be new to the space?
DMC: Don’t focus too much on valuations going up and down in a short period of time, since it’s really all about the holding period. Some companies that have gone public after 12 months are down, but that’s what happens in a public market – there tends to be a lot more movement than before the IPO.

AMD: If the goal is to buy and hold, does this short-term volatility matter?
DMC: If the company is building a good business, the day-to-day ups and downs don’t matter as much. Many companies have a lot to prove, but being able to identify the long-term winners from the losers is ultimately what investing is all about.

AMD: Are some companies still able to raise capital in the private side?
DMC: There will definitely be a flight to quality, or perceived quality. A lot more attention is being paid to negative cash flows and the overall quality of the business. That just means those companies that can raise right now may end up cleaning up. Good investors will still compete over those deals.

AMD: Is it fair to say that a large capital raise today is more of a positive signal than it was last year?
DMC: Oh, yes - absolutely. Companies that can get deals done are going to be standouts.

AMD: Many new venture investors have never seen the market take a turn. As they see a business cycle, something that is quite common, how should they approach investing?
DMC: Uncertainty simply means that it could be the right time for some to buy and for some to sell. There are certainly a lot more sellers now on the secondary market, and with pricing pressure working against them, it may present an opportunity to investors who have been paying attention.

AMD: Any final thoughts?
DMC: An area of focus for both early stage and late stage investors should be finding platforms that provide both liquidity and investment opportunities in more established companies. At 500 Startups, we pay attention to this because investing is all about portfolio management and dollar-cost averaging.

A personal thank you to Dave McClure for taking time to share his thoughts on private markets. Have another question related to venture investing? Ask in the comments below or tweet at us @EquityZen.


Square's S-1: Of Ratchets and Unicorn Valuations

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Shriram Bhashyam   November 11, 2015

I recently wrote an article for TechCrunch on Square's IPO filing, a (not so little) investment protection known as a ratchet, and larger implications for how to think about Unicorn valuations. We often read about tech companies raising increasingly larger rounds at increasingly lofty valuations. Square's IPO filing, which is publicly available, gives us a peek into the details around private fundraises and the protections VCs get in these deals.

My article is excerpted below:

Over the last 18 months, those of us following the venture and startup space have gone on a rollercoaster ride of mega rounds, Unicorns, sky-high valuations, and bubble fears. Look beyond the hyperbolic headlines and you’ll see that there is more than meets the eye to that shiny new Unicorn valuation. Square’s recent IPO registration statement provides an opportunity to peel the onion on Unicorn valuations (i.e., valuations of $1 billion or greater).

Square's Ratchet

A little more than a year ago, Square raised a $150 million Series E round at a reported $6 billion valuation. The round was led by the Government of Singapore Investment Corporation, with participation from Rizvi Traverse and Goldman Sachs. What we didn’t know then, that we know now, thanks to the S-1 filing, is that the Series E investors had an IPO protection in place known as a ratchet. A ratchet, in this context, provides that if the IPO price does not meet a certain level, say at least the price paid by the investor in the private round or some baked in rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.

I know--that wasn’t easy to follow. But Square’s ratchet will bring the abstract to reality. A quick aside on venture investments. Venture investors are typically issued preferred stock that converts to common shares, based on a given formula, in the event of an IPO. From Square’s S-1, we know that its Series E investors paid $15.46 per share for Series E Preferred Stock. The ratchet in Square’s Series E provides that if the IPO price is less than $18.56 per share, the IPO conversion formula is adjusted such that the Series E investors would receive a number of common shares equivalent to a number if the IPO price had been $18.56. What does this mean? Square’s Series E investors were guaranteed a 20% return in an IPO. On November 6, 2015, Square announced that it expects to price its IPO between $11 and $13 per share. If the IPO were to price in the midpoint of the range ($12 per share), the Series E investors would be issued approximately an additional 5.3 million shares—or $63.6 million of value—under the ratchet in order to achieve the guaranteed return.

Zooming Out

Square is not alone in providing its investors with protective provisions like a ratchet. Box had a similar ratchet in place. It’s increasingly common in mega rounds to build in protections such as IPO ratchets. It’s a sort of win/win for companies and investors. Companies get their shiny Unicorn valuation (which helps with recruiting, in addition to being the vanity metric du jour), and investors get some downside protections, which can even guarantee a minimum return, as in Square’s case. In fact, the law firm Fenwick & West LLP studied venture-backed companies that raised at Unicorn valuations in the twelve months trailing March 31, 2015. That study found that 30% of venture-backed companies that raised capital at Unicorn valuations provided IPO protections in the form of a ratchet.

There are other protective provisions being given by companies, which indicate that Unicorn valuations come with plenty of fine print. In addition to IPO protections, like the ratchet, late stage investors bestowing Unicorn valuations are also receiving acquisition protections. While the 1X liquidation preference is standard, the Fenwick & West study reveals that 19% of financings analyzed included senior liquidation preferences for the investors in the latest round over other series of preferred stock (in simpler terms: last money in, first money out).  Additionally, issuance of participating preferred stock is on the rise, having been issued in 5% of deals in the Fenwick & West study. Participation rights afford its holder a claim to not only the liquidation preference in an acquisition, but also a pro rata share (on an as-converted basis) of proceeds due to common holders. This “double-dip” was common in the following the dot-com bubble, but had disappeared in the recent bull-run in VC. These elaborate provisions give investors in Unicorn financings (i.e., the Big Boys) significantly more downside protection than public company common stock investors.

Rethinking Valuations

The salient point here is that Unicorn valuations often come with asterisks. One may argue that following its Series E round, Square was actually not worth $6 billion (prominent VCs have recently debated this point on Twitter)...

Continue reading on TechCrunch.