Professor Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University, is a leading expert in the fields of corporate finance and equity valuation.  Yesterday, Prof. Damodaran posted a very interesting article on his Musings on Markets blog called "The Ride Sharing Business: Is a Bar Mitzvah Moment Approaching?"  ​

In this article, Prof. Damodaran examines the ride sharing market, the business model, and an analysis of a ride-sharing company's transition from surface measures of growth to more substantive measures of monetization.  He then updates his valuation of Uber, which he valued at $23.4 billion in September 2015, to $28 billion, which is significantly lower than the reported pricing of Uber's recent financing rounds.

It's a fascinating article and well worth a read.  He also has a downloadable spreadsheet which contains his valuation model.  Finally, he has added a video explaining his valuation methodology.

Disclosure: Prof. Damodaran was a teaching assistant for an economics course I took while I was an undergraduate at UCLA.

Links:
Damodaran's NYU page: http://pages.stern.nyu.edu/~adamodar/
Damodaran's blog: http://aswathdamodaran.blogspot.com/
Damodaran's blog post on Uber: http://aswathdamodaran.blogspot.com/2016/08/the-ride-sharing-business-is-bar.html

Link to a prior blog post on this topic:
http://www.allenlatta.com/allens-blog/gurley-v-damodaran-on-ubers-valuation
​

The Wall Street Journal has two articles today that are of interest to shareholders of startup companies, primarily former employees who hold shares of these startups.  The articles "Startup Employees Invoke Obscure Law to Open Up Books" and "Own Startup Shares? Know Your Rights to Company Financials" discuss laws that may require some startup companies to deliver certain financial data to shareholders which may help these shareholders value their stock.  

Specifically, the articles reference Section 220 of the Delaware General Corporations Law, Section 1501 of the California Corporations Code and Rule 701 of the Federal Securities Act of 1933.  These provisions may provide certain shareholders of some private companies the ability to obtain selected financial statements.

Links:
http://www.wsj.com/articles/startup-employees-invoke-obscure-law-to-open-up-books-1464082202

http://www.wsj.com/articles/own-startup-shares-know-your-rights-to-company-financials-1464082203

According to the Business Insider article "'The Great Reset': Venture Capitalists and Startups Have Shifted from Greed to Fear," the technology startups and venture capitalists have begun to temper valuation expectations.  This is driven by a number of factors, including (1) the slowdown in the tech IPO market, (2) public tech company valuations have declined, some significantly, making many private tech companies looking overvalued, and (3) some tech companies are now laying off people.  

The article indicates that the conversation is changing between venture capitalists and startups, with VCs asking tougher questions, and now looking for "cockroaches" - companies that can survive in any market.

It's an interesting article and worth a read.

Link:
http://www.businessinsider.com/the-great-reset-vcs-startups-go-from-greed-to-fear-2016-2?op=1

Investment in US venture-backed companies reached $15.7 billion in the first quarter of 2015, according to data provided by Dow Jones VentureSource and quoted in today's WSJ.com article "Startup Funding Hits 15-Year High While Valuations Set Record."  A few highlights from the article:

• The $15.7 billion invested in 1Q2015 is up from the $15.6 billion invested in 4Q2014 and up from $12.4 billion invested in 1Q2014.
• Venture-backed companies had the highest median valuations on record during the first quarter.
• The largest financing in the quarter was a $1 billion round by SpaceX.
• There were 12 venture-backed IPOs in 1Q2015, down from 23 IPOs in 4Q2014.
• M&A was down in 1Q2015, with 104 deals in the quarter, down from 109 in 4Q2014, and the amount paid in 1Q2015 was down a whopping 71%, at $9.9 billion, compared to the $33.8 billion paid in 4Q2014.

Link to article: 
http://blogs.wsj.com/digits/2015/04/20/startup-funding-hits-15-year-high-while-valuations-set-record/

Mike Moritz, the Chairman of famed venture firm Sequoia Capital, has cautioned that valuations are very high and that a number of "unicorns" - startups that are valued at over $1 billion - will become extinct.  Both Business Insider and Fortune have good analyses of Moritz's warnings (the remarks were made originally in an interview with The Times of London, but the article is only available to subscribers).

Moritz joins other notable venture capitalists, such as Bill Gurley of Benchmark, in warning of valuation concerns in Silicon Valley.

While Moritz does believe that valuations are "very sporty" and that some unicorns will fail, he also adds that "a good number" of unicorns that will succeed.

Moritz also feels that while there will be a setback in Silicon Valley tech, he does not believe it will be as bad as the tech bubble bursting in 2000 because companies today are more sustainable.

Links:
Business Insider article:
http://www.businessinsider.com/michael-moritz-warns-that-the-bubble-is-about-to-burst-2015-3
Fortune article:
http://fortune.com/2015/03/24/sequoias-moritz-joins-chorus-of-concern-about-silicon-valley-valuations/

There's an interesting post by Glenn Solomon, a partner at GGV Capital, on his blog, called "Why Private, Late-Stage Valuations are Skyrocketing."  This is an interesting read, and I recommend it.  In the post, he points to four reasons why valuations of private, later-stage venture-backed companies have seen such extreme valuations:

• Scarcity - private companies are harder to access than public companies, so when a private company raises money, "fierce competition ensues for these scarce slots" in the best companies.
• Momentum - the strategy of paying high valuations in private rounds has paid off, which attracts more capital to the system, and creates momentum for the strategy to continue.
• Fear of Missing Out (FOMO) - VCs want to be associated with winning companies.  While the ultimate metric to judge a fund is the long-term return, in the shorter term, VCs can claim success by investing in companies that are perceived as "winners."
• Gains - a critical question is how much of the returns from these healthy valuations are paper returns and how much are from true realizations.  Solomon does not answer this question.

I generally agree with the points raised in this article, but would add a few more:

• Public valuations.  The Nasdaq 100 Technology Index (NDXT) is up over 17% in the past year.  The stock price for Box, Inc., the cloud-based file sharing company, is up nearly 50% from its IPO price.  Frothy public valuations also add to the private, late-stage valuation frenzy.
• Results and the Halo effect.  Many of these later-stage private companies are posting remarkable results, such as hyper-revenue growth.  It is these stars that lead the pack in valuation, and other later-stage companies benefit from the halo effect.

Aswath Damodoran, the valuation guru and Kershner Family Chair in Finance Education at NYU Stern, has posted an interesting article on pre-money and post-money valuations in the venture capital context on his blog Musings on Markets.  The blog entry is "Blood in the Shark Tank: Pre-Money, Post-Money and Play-money Valuations" and it is especially useful to entrepreneurs who are looking to raise venture funding.

Link: http://aswathdamodaran.blogspot.com/2015/02/blood-in-shark-tank-pre-money-post.html

With Uber's recent $1.2 billion financing round that valued the company at $40 billion, it is only natural that the valuation would be questioned.  Here are some of the posts from around the web:

Aswath Damodaran's Crowd Valuation of Uber
This is a fascinating post which enables the reader to analyze Uber and derive a valuation based on the reader's inputs. There's a spreadsheet to create a valuation and then another one to share it.  Highly Recommended.
http://aswathdamodaran.blogspot.com/2014/12/up-up-and-away-crowd-valuation-of-uber.html

Fortune: Uber is now more valuable than 72% of the Fortune 500.  
This post highlights that at a $40 billion valuation, Uber is valued higher than companies including Charles Schwab, CBS, Viacom, KKR, Aflac, Hilton, DISH Netowrk, etc.
http://fortune.com/2014/12/04/uber-valuation-40-billion-fortune-500/

Forbes: The Five Keys to Uber's Valuation.  
This post looks at Uber's valuation from a marketing and branding perspective.  I'm not sure I agree with the points, but it's interesting.
http://www.forbes.com/sites/jonathansalembaskin/2014/12/05/the-5-keys-to-ubers-valuation/

AP: Surge Pricing: Uber's $40B valuation.  Worth it?  
This post looks at the pros and cons of an investment in Uber.  Interesting analysis.
http://bigstory.ap.org/article/b13630d27c304c5984e5f68345818570/uber-car-service-really-worth-40-billion

I'll add to this list as I find more interesting posts.  If you have any you'd like to share, please submit a comment.  Thanks.

Uber, the mobile ride-booking company, has today announced that it has raised a new $1.2 billion Series E preferred stock financing round.  This financing round values the company at a jaw-dropping $40 billion valuation, according to NY Times Dealbook.  The financing could ultimately raise a total of $1.8 billion with an additional close.  This financing is separate from a convertible debt offering that Uber is selling to Goldman Sachs' high net worth clients, according to Fortune.  

This valuation is a steep mark-up from the $18 billion valuation Uber obtained in June, when it raised $1.2 billion.  This is a mark-up of 2.2x in about 6 months.  In two previous blog posts, the $18 billion valuation was explored.  Here are the links to the prior blog posts:

Is Uber Worth $18.2 Billion?: 
http://www.allenlatta.com/allens-blog/is-uber-worth-182-billion

Gurley v. Damodaran on Uber's Valuation:
http://www.allenlatta.com/allens-blog/gurley-v-damodaran-on-ubers-valuation


Links:
Uber's blog post announcing the financing:  http://blog.uber.com/ride-ahead

NY Times DealBook article:
http://dealbook.nytimes.com/2014/12/04/uber-files-to-sell-1-8-billion-in-new-shares/

Fortune article:  
http://fortune.com/2014/12/04/uber-files-to-sell-1-8-billion-of-new-stock/

Uber has raised $1.2 billion at an $18.2 billion post-money valuation - see Uber's blog post here.  The investors in this round must believe that Uber is worth this valuation, or else why would they have invested?  Investors at the $18.2 billion valuation include Fidelity Investments as lead investor, BlackRock, venture capital firm Kleiner Perkins Caufield & Byers and Google Ventures.  These are smart, sophisticated, successful investors.  But $18.2 billion?  Some are skeptical.

In the WSJ post "Uber's $18.2B Valuation Is a Head Scratcher" author Christopher Mims discusses how the "moat around Uber's services is incredibly shallow" and discusses how competition, a "frictionless market" and Uber's lack of owning its ecosystem present issues for the valuation.  At the end of the article, which is worth a read, Mr. Mims takes a look at Uber's valuation and says that even if Uber captures 50% of the world taxi market in 5 years, the company would still be less than $18.2 billion.  Here's the link to the article:  http://blogs.wsj.com/digits/2014/06/06/commentary-ubers-18-2b-valuation-is-a-head-scratcher/

The Huffington Post article "Uber Worth $18 Billion Because Sure, Why Not?" written by Mark Gongloff skeptically compares the valuation of Uber to that of other companies, and states that at $18 billion, Uber is worth more than half the companies comprising the S&P 500 index, more than all of the personal real estate in Falls Church, Virginia, more than Alcoa, Clorox, Chipotle or Whole Foods.  Here's the link: http://www.huffingtonpost.com/2014/06/06/uber-18-billion_n_5460748.html

Finally, in the San Jose Mercury News article "Uber valued at a whopping $18.2 billion,"  author Heather Somerville notes that Uber is now the most-highly valued private US venture-backed company (ahead of Airbnb and Dropbox at $10 billion, Palantir at $9 billion and Pnterest at $5 billion) and worth more than rental car companies Hertz (market cap of roughly $12 billion) and Avis ($6 billion).  The article also explores some of the issues confronting Uber, including regulatory and legal issues.  Here's the link: 
http://www.mercurynews.com/business/ci_25913159/18-2-billion-valuation-makes-uber-top-venture

To me, whether this valuation is correct or not (and only time will tell), it is another example of how frothy the market is for venture capital-backed technology companies in the "sharing economy" sector.

Fred Wilson, a managing partner at Union Square Ventures and blogger at his site avc.com, recently wrote a post called "The Bubble Question."  I found this post to have a pretty good explanation of the relationship between interest rates and valuation, and a discussion of why we are seeing sky high valuations for high growth tech companies.  Well worth a read.

Link to post: http://avc.com/2014/03/the-bubble-question/

Hedge fund trader Doug Kass has published his "10 Laws of Stock Market Bubbles" which I found very interesting.

His 10 laws that indicate when a stock market bubble exists are:

1. Debt is cheap.
   
2. Debt is plentiful.
3. There is the egregious use of debt.
4. A new marginal (and sizeable) buyer of an asset class appears.
5. After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.
7. The newer the valuation methodology in vogue the greater the degree of bubbliness.
8. Bad valuation methodologies drive out good valuation methodologies.
9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed "financial weapons of mass destruction").

In his article, he uses these laws to analyze the current environment.  It's a thoughtful piece and worth the read.  
Here's the link:  http://www.thestreet.com/story/12104017/1/kass-10-laws-of-stock-market-bubbles.html

Aswath Damodaran, valuation guru and Professor of Finance at Stern School of Business at NYU, recently posted his valuation analysis of Twitter.  If you're interested in valuation methodology, this is a great article.  Be sure to read the comments as well, as Prof. Damodaran answers valuation questions.  Here's the link: 
http://aswathdamodaran.blogspot.com/2013/10/twitter-announces-ipo-valuation.html

Here's a link to Prof. Damodaran's website, which as all sorts of useful valuation information:
http://pages.stern.nyu.edu/~adamodar/

Personal note: Prof. Damodaran received his MBA and Ph.D. in Finance from UCLA.  I was an undergraduate student at UCLA at the time that Prof. Damodaran was pursuing his graduate degrees at UCLA.  Prof. Damodaran was the teaching assistant for one of my Economics courses, and I still have his handouts from that class.

Aswath Damodaran, the renowned Professor of Finance at NYU Stern School of Business, is a leading authority on valuation.  My connection with Prof. Damodaran is UCLA, where he received his MBA and Ph.D. in Finance.  I was an undergraduate student at UCLA at the time that Prof. Damodaran was pursuing his graduate degrees at UCLA.  Prof. Damodaran was the teaching assistant for one of my Economics courses, and I still have his TA handouts from that class.  I had the pleasure of saying hello to Prof. Damodaran a few years ago at a Valuation Symposium sponsored by the CFA Institute in New York and mentioned to him that I still had his notes!

If you have the opportunity to hear him as a speaker, please go.  You'll be glad you did.

SeekingAlpha.com has a recent article summarizing some of Prof. Damodaran's valuation rules of thumb that are very interesting.  Here's the link:  http://seekingalpha.com/article/1448791-aswath-damodaran-valuation-in-the-face-of-uncertainty

This article references another article that appears on the CFA Instutute Enterprising Investor Blog.  Here's the link:  http://blogs.cfainstitute.org/investor/2012/09/04/how-does-growth-investing-measure-up/

Here's a link to Prof. Damodaran's NYU Stern website:  http://pages.stern.nyu.edu/~adamodar/

Finally, here's a link to the NYU Stern faculty director page for Prof. Damodaran:  http://www.stern.nyu.edu/faculty/bio/aswath-damodaran

Enjoy!

Lifetime Value (LTV) is a tool used in marketing to estimate how much a customer is worth over the entire time the customer remains with the company.  Bill Gurley, the author of the Above the Crowd blog, wrote an interesting post a while ago on the LTV formula and discussed several of its pitfalls.  In "The Dangerous Seduction of the Lifetime Value (LTV) Formula" he lists 10 reasons to "avoid worshiping at the LTV altar":

1. LTV is a tool, not a strategy.
2. The LTV model is used to rationalize marketing spending.
3. The model is confused and misused.
4. The formula is not absolute.  It's at best a good guess.
5. The LTV variables "tug" at one another.  The variables in the LTV equation are interdependent, not independent.
6. Growing becomes a grind.  Investing heavily in marketing doesn't necessarily lead to a commensurate drop in subscriber acquisition costs.
7. Purchased customers underperform organic on almost every metric.
8. The money could go to the customer to provide a better value proposition to the customer and to provide a better customer experience.
9. LTV obsession creates blinders.  Companies that obsess over LTV can become overwhelmed by it, whereas scrappy companies can find more efficient forms of marketing.  Bill uses a great example here.
10. Tomorrow never arrives.  It's difficult to create permanent equity value with LTV.

Here's the link:  http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/
Also, some of the comments are very interesting.

J.J. Colao of Forbes, provided a defense of LTV in "In Defense Of The Lifetime Value (LTV) Formula."  The article points out that with the proper oversight, LTV can be effective.  It also provides a very interesting real-life example.  The article offers five tips for effectively applying the LTV formula in a business:

1. Prize customer experience above all else.
2. Keep the variables clean.
3. Isolate customer segments, and then apply the formula.
4. Don't rely on conventional marketing.  Use a variety of marketing approaches, such as viral, social and PR.
5. Maximize LTV to a point, then scale.

Here's the link:  
http://www.forbes.com/sites/jjcolao/2012/09/13/a-dangerous-seduction-revisited-in-defense-of-the-lifetime-value-ltv-formula/

Zoran Basich's article "Is Valuing a Young Start-Up More Art or Science?" that appeared yesterday on the Wprovides an interesting look at how venture capitalists value startup companies.  The article profiles Pinterest and the valuation methodology used by seed investor FirstMark Capital for the seed round.  Its a good read.  Here's the link:  http://blogs.wsj.com/venturecapital/2012/09/27/is-valuing-a-young-start-up-more-art-or-science/

Glenn Solomon, a partner with GGV Capital, contributed a post to Fortune's From the Crowd Blog "3 Reasons VCs Can Get IPOs Very Wrong" which explores some reasons why venture capitalists may over-value private companies prior to their initial public offerings.  The post was written on May 21, just after Facebook's IPO (which looked successful at that time), but before Facebook's stock price broke the IPO price.  The post uses Zynga and Groupon as examples of returns VCs have obtained in later rounds or in secondary purchases prior to the IPOs of these companies.  Solomon points to three primary factors that might have played a role in VCs obtaining less than stellar returns from these pre-IPO transactions:

• Growth Rate Emphasis.  VCs are very focused on growth rates and will pay high valuations for companies that are growing very rapidly.  However, the public market isn't willing to pay extra for high growth, so there's a disconnect which may lead to VCs overvaluing a company prior to its IPO.
• Profit Margin Factors.  Many private, rapidly growing companies aren't profitable, and so the basic public market metric of P/E ratio doesn't apply.  Because of this, VCs look at Price/Sales ratios.  While public investors do this as well, they want to see earnings and margin expansion over time.  As it can take time for this to happen, public investors may value these companies lower than VCs.
• Valuing Unproven Models.  When a company introduces a new business model, it won't have comparable companies to use to measure performance.  As a result, public investors can be uncertain as to how to value these companies until the business models are more mature, leading to volatility in valuation.

I think this is an insightful post and a good read.  Here's the link:  
http://finance.fortune.cnn.com/2012/05/21/3-reasons-vcs-can-get-ipos-very-wrong/ 

Link to Glenn Solomon's blog:  
http://sandhillrdmeetswallst.com/ 

Kim-Mai's article on TechCruch "It’s Not A Bursting Bubble. It’s a Correction And It Will Take Awhile." provides a good look at the current state of valuations of early-stage technology companies in the aftermath of Facebook's initial public offering.  The article also discusses the fundraising environment and lists several early-stage venture capital funds that have been raised recently.  Interesting read.  Here's the link:
http://techcrunch.com/2012/06/08/its-not-a-bursting-bubble-its-a-correction-and-it-will-take-awhile/ 

There are conflicting reports of Facebook's valuation at its initial public offering.  The Wall Street Journal reports an IPO valuation of $96 billion; Forbes indicates the IPO market cap is $86 billion; my prior post on the matter estimates an IPO market cap of $75 billion.  What gives?  Basically there are two reasons for the difference.  First is the difference between "market capitalization" and "valuation."  Second is how these terms are calculated, which in Facebook's case primarily relates to the issue of how to treat options and similar instruments.

"Market capitalization" or "market cap" is basically the stock price multiplied by the number of shares currently outstanding.  In Facebook's case, the targeted IPO stock price is between $28 and $35 dollars (according to its registration statement - see prospectus cover page),  and it will have  2,138,085,037 shares outstanding after the IPO.  This gives an IPO market cap of $59.9 billion at the low end of the range ($28 per share), $67.3 billion at the mid-point of the range ($31.50 per share), and $74.8 billion at the top of the range ($35 per share).  My post used the high end of the range to calculate Facebook's IPO market cap.

Market cap has a drawback in that it does not take into account the impact of stock options and the like, which when exercised adds to the number of shares outstanding.  In Facebook's case, page 42 of the prospectus indicates there are potentially a total of nearly 681 million shares which could possibly be exercised at some point in the future and added to the 2.1 billion outstanding.  This includes 378 million shares pursuant to restricted stock grants, 116 million shares through Class B stock options, 60 million from a stock option issued to Mark Zuckerberg, 25 million shares from recent option grants and stock issuances, 23 million shares to be issued to Instagram when the acquisition closes, and another 77 million shares that could be issued in the future under equity compensation plans.  Backing out the 77 million reserved for future issuances (because this may or may not be issued), the total becomes 603 million shares that could be issued from exercises of stock options, etc.  Assuming that all of these shares are issued (which is unrealistic, but provides an upper end to the range), total shares outstanding on a "fully-diluted" basis are 2,741,567,754, which multiplied by $35 per share (the top of the IPO price range) gives a "fully-diluted" valuation of nearly $96 billion.  This is what The Wall Street Journal reports for the IPO valuation.  At the mid-point of the range, the fully-diluted equity valuation is $86 billion, which is what Forbes is reporting.  In my opinion, Forbes should not have used the term "market cap" in the title of the article as what it refers to in the article is fully-diluted equity value.

Now the corporate finance purists will say that the above analysis is incorrect, because it does not take into account the strike prices of the options.  This is true - the above is a quick and dirty analysis.  However, because the strike prices are very low (6 cents for the Zuckerberg option) and 95 cents for the Class B options, calculating the option shares using the Treasury method won't have a material effect on the above analysis.  Also, some purists will say that the valuation should be "enterprise value" and they would be correct, but that's a topic for a future post.

Links:
Facebook S-1/A registration statement:  http://www.sec.gov/Archives/edgar/data/1326801/000119312512208192/d287954ds1a.htm 

The Wall Street Journal article:  
http://online.wsj.com/article/SB10001424052702304746604577382210530114498.html 

Forbes article:  
http://www.forbes.com/sites/tomiogeron/2012/05/03/facebook-seeking-ipo-with-market-cap-of-86-billion/ 

My prior post:  
http://www.allenlatta.com/1/post/2012/05/facebook-files-targeted-ipo-price-range.html