Previously, we only showed “high fidelity” sources like SEC 10Qs and 10Ks and articles from The New York Times, Wall Street Journal or the Financial Times. In response to customer feedback, we now show any source we find data in and let you determine the veracity of the source. What we’ve heard over and over again from customers is that some data is better than no data especially since you can see the data source.
Why We Built Private Company Valuation and Valuation Multiple Search?
As with most of our product roadmap, this capability came because of conversations with clients. And in particular, one client named Alex. Alex is an investment banker. And he was in charge of the valuation and valuation multiples data at his firm.
It sounds glamorous.
It is not.
Being the analyst in charge of this data meant Alex would search the web using a mix of Google Alerts, RSS feeds and manual reviews of TechCrunch, GigaOm, AllThingsD and a few other sources looking for info on valuations of financings or exits and put them into a spreadsheet. Once the transaction was identified, he’d do more Googling to identify revenue or other operating or financial metrics for these companies. His goal was to find valuations and the even more elusive valuation multiple for as many private company transactions as he could.
This spreadsheet was then used in the firm’s pitches, analyses, etc. It is a spreadsheet, but everyone refers to it as a “proprietary valuation database” when talking to clients.
But back to Alex. He graduated from an Ivy League school, but was essentially doing data entry. He could be doing analysis and thinking about the data, but instead he was fumbling around using Google and a bunch of cobbled together sources to populate a spreadsheet that was informing his bank’s conversations with clients. The process was highly imperfect in terms of its comprehensiveness, speed, scalability and even credibility.
We decided that we could improve Alex’s life (and many other clients whose jobs are similar to Alex’s at VC and investment banking firms). This was the genesis of private company valuation and valuation multiple search
(Note: Alex is not the client’s real name.)
Where do we get our valuation and valuation multiple data from?
We use two methods to collect our valuation data. The first, our technology-driven process that collects valuation, operating, and financial metrics data. The second, a manual review thousands of federal and state filings that have traditionally been unavailable--our enhanced valuation data. By combining these efforts we are able to offer our clients the most comprehensive and accurate valuation data available .
Since 2008 we have been collecting “whisper” valuations by crawling over 100,000 public information sources daily—everything from semi-structured sources like SEC filings to unstructured sources like regional, national, and international newspapers to corporation and investor websites to trade publications and press releases.
Then we programmatically identify real and rumored valuation data as well as operating and financial metric data. This can be anything from revenue to EBITDA to number of customers to number of users. Most frequently, the metric we capture is revenue, as many high-growth private companies tend to report (or leak) this info. It also allows for comparisons across companies.
Using advanced machine learning algorithms, we are able to scalably capture more private company valuation and metrics data more quickly than any other source. The days of manually reviewing five blogs and a handful of Google Alerts are over.
Our enhanced valuation data uses the same process attorneys, auditors, and valuation firms use to evaluate private companies. This process uses old school elbow grease to review federal and state filings including certificates of incorporation (or restated COIs for later rounds), franchise tax statements, annual reports, Form Ds, applications of authority, employee plan exemption notices (EPENs), limited offering exemption notices (LOENs) and more.
Collecting enhanced valuation data is three step process. First, we procure the filings from state and federal agencies, an approach that can cost up to $1000 per company. Second, because reporting requirements vary state to state, we structure the information as data inputs into our database. Lastly, we synthesize the data to calculate valuation metrics.
The valuation metrics we report on include post-money valuation, liquidation preference and multiple, round direction (upround or downround), anti-dilution protection, pay to play provisions and dividend rate.
This data is all yours, you can even click through to underlying information sources or request the filing so you can see exactly where the data is coming from. We think that this is a critical part of making you feel comfortable with where the data is coming from and helping you make your own judgments on how useful it is. Our goal is to arm you with more data than you’d be able to gather on your own.
Are these valuations real or rumored?
Our valuation data is both real and rumored, coming from 100,000+ sources that we crawl every day, and so it can range from rumors on blogs to figures given in annual reports filed by public companies with the SEC. You always have visibility into where the data is coming from since you can click through to the underlying information sources.
It wasn't always this way. Initially, we used to only take data from what we viewed as "high veracity, " like SEC filings, company/investor/acquirer press releases, and publications like the Financial Times, Wall Street Journal, and NY Times. Customers, however, said that given the opacity around private company valuation and multiples data, they’d prefer more information than less.
They told us to give them everything, the full firehose. We obliged.
Customers preferred that we highlight all data and let them see the sources so that they could determine their veracity on their own. Instead of us making a judgment about a source's quality, they wanted to be armed with data and judge for themselves.
How are our customers using our valuation / valuation multiple search?
For almost all of our customers, private company valuation and valuation multiple search is replacing manual work that analysts and associates were doing. We're hitting more information sources than humanly possible and doing it more quickly too. This gives many analysts hours of their lives back to do more thoughtful work (or maybe even get out of work early on occasion).
Below are some slightly more specific use cases by specific customer types ranging from venture capitalists to corporate development/M&A and investment bankers.
Venture Capital Investors (and Corporate Venture Investors)
There are two main reasons why a VC firm might have to value a private company.
- Accounting and LP reporting purposes - VCs are investing other people's money and so they need to be able to report back to their LPs on how their investments are doing.
- To assess the value of current and prospective investments - Companies they are thinking about investing in or portfolio companies that they’re exiting (especially those via acquisition) all need to be valued. They need comps.
Customers use our private company valuation data for both of these use cases.
Accounting and Limited Partner (LP) Reporting
When it comes to accounting, before 2007, the easiest and most common way to value a private company asset was to simply use the value that you, or another investor, last paid for it. However, as the International Private Equity and Venture Capital Valuation Guidelines point out, there are a lot of variables that could have changed from the last time you invested in a company.
Things that can change a valuation:
- New patent approvals
- Change in development phase
- Change in market size
- Change in market share
- Change in customer satisfaction
- Change in cash burn rate
Near the end of 2006, the Financial Accounting Standards Board required that all financial firms had to use fair value when valuing their portfolios. This meant that firms could no longer just look up the last price they paid and use that.
Of course, there was a big debate about whether this was actually a good thing for the industry. A lot of venture capitalists, such as Brad Feld of Foundry Group, thought it was a waste of time and money. Many others, like large accounting institutions, called it "broader, more comprehensive business reporting that provides sufficient information to investors."
Regardless of which side you're on, FAS157 meant that VCs now are forced to use valuation multiples as a method of valuation. Of course, using multiples in these situations runs into the same problems as before—a lack of private company exit information and so firms must rely on public market comparables. A Series A-backed
eCommerce company and Amazon are not really comps. And so our private company valuation data is used to unearth more legitimate comparables.
Assessing Company Valuations at Time of Financing or Exit
The second situation in which VCs requires a valuation is when they’re contemplating investment in a company or aiming to value an existing portfolio company at time of exit.
In the case of an investment, they need to know how much they should be paying for the amount of equity they receive. There is a specific method that VCs use to value startups called The Venture Capital Method. The VC method is essentially a backwards version of the basic multiples method that was first outlined by Bill Sahlman of Harvard Business School in the 80's.
Determining the valuation of a private company is an inexact science and is subject to negotiation with other investors and the entrepreneur, but being armed with more and better data is helpful. Other terms, ranging from liquidation preferences to option pools to board representation, are all part of the process.
Venture capital firms will also use our private company valuation and valuation multiple data when involved in negotiations with a potential acquirer. The process is similar to valuing a private company for investment in many ways except here the negotiation is happening with a potential acquirer. Again, good private company comparables data is hugely valuable in these cases.
CB Insights private company valuations and multiple search streamlines the VC process and provides better, closer comparable data for both new investments and potential exits. CB Insights provides not only the data, but an easy way to filter and sort the data to find the precise group of comparable companies that an accurate and credible valuation requires.
Corporate Development / M&A
Corporate Development and M&A teams, by definition, are constantly looking at potential acquisition targets; knowing how to value these companies is critical to their work.
Knowing how much to pay for a private company when valuation and valuation multiples data is difficult to come by is critical. As a result, corporate development teams use our private company valuation data and valuation multiples data to make better and more data-driven decisions about how to value companies.
They are also using CB Insights to track the acquisitions in sectors and industries of interest as well as among competitors in the marketplace.
Investment bankers of all stripes use our private company valuation data for:
- Sell-Side M&A - When advising a client on how they should value themselves as part of a sale or when trying to educate a potential buyer on the value of your client’s business, robust private company valuation data is vital.
- Buy-Side M&A - Educating your client about the current valuation landscape and what appropriate valuations are for companies they may be evaluating is necessary. Using private company valuation data to help strengthen your client’s case during the negotiation process is also a critical skill.
- Capital Raising - Trying to help a client company raise money? Understanding the financing and exit multiples of comps is a key part of educating them and helping clients and investors alike understand the range of acceptable and practical values of the company.
- Thought Leadership - Whether it's pitching new clients, speaking at a conference, or issuing a whitepaper on industry trends; access to and use of CB Insights’ private company valuation and multiples data is a clear way to stand out in the market.
The goal with our valuation data is to help make both your targeted and more broad-based sell-side, buy-side, or capital-raise efforts more efficient and to arm you with information and knowledge that makes you more powerful in negotiations.
Private company valuations: the current state of affairs
For those less familiar with valuation strategies, we’ve included a primer below. If you’re a seasoned VC, banker, or corporate M&A professional, this will be old hat (you should just login to CB Insights and try private company valuation and valuation multiple search for yourself).
What are the difficulties of figuring out private company valuations?
There are two main components that go into a traditional valuation: financial information and history. You use the history of a company combined with its current financial state and growth in order to get a sense for the company and its operating and financial metrics going forward. A young, fast-growing private company often has too limited a history or financial data to be useful under this traditional method.
All this leads to a commonly held opinion—and the headline of a recent Forbes article—that "Valuing Private Companies is an Art, Not a Science." Unfortunately, most folks are not good artists and so as NYU Professor Aswath Damodaran puts it, "the story dominates and the numbers lag."
We hope that we can make the process a bit more science and less art with private company valuation and multiples search.
1. DCF Analysis
The first way anybody will tell you to do a company valuation is with a DCF (discounted cash flow) analysis. The theory behind this strategy is that a company's value is equal to all the money (future cash flow) you would ever get from that company if you owned it, discounted back to today. Basically, you add up what you think the future cash flows of a company will be and then you apply a discount to that value to make up for the fact that you are paying up front.
There are three main factors that go into a discount rate:
- Risk-Free Rate - if you invested all your money in an assumedly risk-free asset like a US treasury bond, you would make a certain amount of money. Your investment in a company is a lot riskier than a treasury bond so it had better beat the return a treasury bond gives you and consider the risk associated with the investment.
- Illiquidity Premium – if an investment can be bought and sold easily, it is deemed liquid. These are things like equities traded on the NYSE or Nasdaq. But private company investments don’t have such liquidity and so the discount rate is higher given that investors in them may be “stuck” for some time.
- Risk Premium - there is always a risk that a company will perform worse than you think it will. In the worst case, the company could even go under. You need to factor this into your valuation. 50% of startups fail by their 4th year. This means that investing in one is a major risk. It is hard to account for this risk in a discount rate but the risk premium aims to capture this.
When valuing a public company with DCF it is generally easier (but by no means easy) to look at its cash flows and do the appropriate math. However, when you're dealing with private companies, as usual, things get more complex. For a private company which is mature and which has steady financials, it is easy to compare the company with similar publically-traded firms to find out how much you should discount the cash flows. With young fast-growing private companies, especially in markets like tech, life sciences, and energy, the DCF model does not work. Here's why:
- These Companies Have Limited History - an important part of using a DCF to value a private company is having a history of financial performance. Many young private companies don’t have this.
- Young Companies are Often Optimizing for Growth (not Cash Flows) - a DCF is only good if there is CF (cash flow). Private companies which may be optimizing for fast growth may have none to limited cash flow to speak of. So while predicting user growth and revenue growth might be feasible and warranted, forecasting cash flows (a metric the company is not optimizing for) is not as useful.
2. Valuation Multiples - the model that works better
Because of these issues, the International Private Equity and Venture Capital Valuation Guidelines specifically state that all private equity and venture capital firms should use valuation multiples to value their portfolio companies, not DCF.
A valuation multiple is a simple ratio that relates a company's financial data to its value on the market. In the case of young high-growth companies, price/sales (or price/revenue ratio) is the multiple most commonly used. It only requires knowing one financial statistic, revenue, that is normally pretty accessible—even for small private companies. If you know the price/sales ratio for comparable private companies, getting the valuation is as simple as multiplying the company in question’s revenue by the comparable's valuation multiple. For example, if your research shows that mobile gaming companies have recently been purchased for 6x revenue, then it not be unrealistic to value a company that does $6M in sales at $36M.
The hard part about this method is getting the data for the multiples. The first step is to find an appropriate group of companies to compare to the company you are trying to value. This could be as broad as something like "all software companies" or as narrow as "mobile payments processing companies." Obviously, the more specific you are, the more accurate the valuation will be but the harder and smaller the data set you have may be. The ideal situation would be to compare to a company that is exactly the same. These comparable companies need to have publically available valuation data so that you can use for this comparison. The next step is to take the average or median or some type of blended average of the price/sales ratios for all comparable companies and then apply that ratio to the company you are trying to value.
Of course, nothing ever comes that easily. There are still a lot of problems with the price/sales multiple valuation. Don't stop reading now, because below we will outline how use this method to get the most accurate possible valuations.
How to overcome the limitations of multiples
(hint: accurate private company data)
There are some major limitation to using revenue multiples to value a company:
- Revenue Multiples Are Static - each piece of multiple data you have only represents that specific snapshot in time. If you are using a price/sales multiple from 2012, that will tell you how the market behaved in 2012, not necessarily today.
- "All Revenues Are Not Equal" - Bill Gurley, General Partner at Benchmark Capital, emphasizes the simple fact that companies are very different—and thus have different values—even if they have the same revenue. There are variables such as market growth, market demand, market competitiveness, profit margins, and marketing prowess that differ from company to company.
- A Lot of People Use Public Comparables - if you thought this valuation science was already a little bit shaky, using public company comparables makes the model fall apart. Simply put, public companies tell us almost nothing about how a private company will be valued. Using public companies adds tons of variables into the mix that are extremely difficult to account for, such as:
- Size - publicly traded companies are substantially bigger than most private companies. This means they will have different management structures, capital structures and accounting standards. Generally, public companies are able to access economies of scale that change how the company is run.
- Liquidity - we went over this earlier, but basically, it is easy to ditch your investment in a public company. It is much harder to trade your stake in a private company.
- Customers - most of the time, public companies face different markets than private ones. A startup might make business intelligence software, but that doesn't mean it is safe to compare with Oracle or Tableau Software. Oracle and Tableau have access to customers (giant enterprises) that a young private company can't access.
- Risk - public companies are normally large and diversified, so they are a safer investment. Young private companies might only compete in one business which adds risk to the investment.
The answer to all of these problems with revenue multiples is a simple one: large amounts of private company valuation data. If you have access to enough private company valuation data, there is a much higher probability of having a current and very similar set of private companies to compare to. Conveniently, this addresses the three main issues with revenue multiples that we talked about above.
A lot of this private company valuation data and multiples information can actually be found using public sources. Unfortunately, it isn't just lying around—it takes a little bit of digging to find. But, there are a couple ways to get it:
- Pay Somebody to Do It - it is possible to get an analyst to sit at a desk all day and scour the internet for these valuations. At a median salary of about $70k, these analysts are getting paid good money to surf Google all day and do data entry. It isn't a very good use of their time or your money.
- Use Technology - there are smart ways to gather this data. Using computer-learning algorithms, companies like CB Insights are able to find this data for you. It scales, is more comprehensive, and frees your team to focus on value-added priorities and work.