Corporate valuation has been a big topic in corporate governance with hundreds of books written, a variety of methods presented. But when the concept of startup (starting with an idea, a technological solution to find new business models) exploded, the valuation of the company became the magic of venture capital funds and investors. founded to blow up the sky.
A company preparing to go on the stock market or stock market is usually priced precisely thanks to the law of supply and demand creates a balance between people who want to buy and who want to sell the company's stock. In contrast, the value of startups is usually determined by venture capital funds based on the amount of money these funds have spent to buy the latest startup stock.
For example, a new investor jumps in to buy 10% of a company for $ 5 million, so the company will be assigned a new value of $ 50 million.
According to Vox, there are three things wrong with pricing a startup that way. At first the money was not real, it only existed on paper. The infamous WeWork business, for instance, made headlines in the past two weeks, just before SoftBank invested another $ 2 billion here earlier this year, when WeWork was valued at $ 20 billion. already; with an additional $ 2 billion, the value of WeWork is inflated to $ 47 billion.
Who, which expert sets this towering price, based on which method? Nobody else! At that time, WeWork, in 2018, lost $ 1.6 billion on its total revenue of $ 1.8 billion; No traditional method of valuation could turn such a heavy loss company into such a high paper value.
Second, the value of a company is therefore very easy to manipulate. It only takes an investor and the founder of a startup to agree on a certain value to be able to declare "setting a new record". Taking the example from the beginning, that $ 50 million business suddenly wants to be raised to $ 100 million, they only need one investor to spend $ 1 million just to own 1 % stake is the new value announcement in public press releases.
Of course reality is not so simple; Venture capital funds are not foolish to value but do not come with conditions to protect their interests. According to Vox, the third dangerous thing is that venture capitalists have enough ways to recover capital by installing conditions; while small investors compete to buy high-priced stocks, the company's employees who work hard to pay for new shares are the ones most at risk when the company's heavenly value falls back on the face of it. land.
In the case of WeWork, founder Adam Neumann quickly sold high-priced shares for $ 700 million before filing on the floor. Therefore, when the scandal broke out, the WeWork value was like a flat ball, Neumann resigned, but he also held a large amount of money.
One immediate consequence of the high valuation of startups is that a series of initial public offerings (IPOs) to bring startups to the stock market have been delayed. In addition to WeWork's exit without a sound, Airbnb, a hotel and housing business that doesn't need any hotel, announced to postpone its IPO until 2020.
An IPO is a test that illuminates whether the previous valuation of the business is accurate, whether it is inflated.
The "unicorn" startups valued at $ 1 billion or more, such as Postmates, Robinhood and Stripe, also gave up early IPO plans. Palantir Technologies, a data mining business founded by billionaire Peter Thiel, will not consider going public for at least the next few years because it can still raise capital from private investors.
In addition to fear of the dramatic price drop, startups are also afraid of IPO, every corner of the business is illuminated, mistakes are outlined, and laxities in management are criticized. The value crisis of WeWork is also due to the IPO record showing how many mistakes the founder made, including appointing his wife as heir, buying real estate and renting it to WeWork, registering the trademark " We ”then forced WeWork to spend nearly 6 million dollars on acquisition …
In other words, an IPO is a test that illuminates whether the previous valuation of the business is accurate, whether it is inflated or not. 2019 saw two cases of continuous price drops; it was Uber before the IPO was valued at about 72 billion dollars, now the price is only 54 billion dollars on the floor; Lyft, another tech taxi business, was previously valued at $ 15 billion and now has $ 12 billion on the floor.
Peloton, a startup in the field of fitness, witnessed a 11% price drop within the first day of listing. In contrast, Pinterest, a social information-sharing service that went public in April 2019, now has a 44% share price. This is because the business valuation of the IPO is very cautious, nearly profitable or at least significantly reduced losses before listing.
* Source: Saigon Times