Distilling Venture Capital · 2023-04-17 · 16 min
Key moments - from our scoring
Substance score
32 / 100
Five dimensions, 20 points each
This episode builds on Greisinger's prior analysis of the Stanford University study 'Squaring Venture Capital Valuations with Reality,' reinforcing why post-money valuation is an inappropriate metric for valuing private tech companies. Post-money valuation ignores the terms, preferences, and rights granted in prior funding rounds, creating a distorted picture that assumes all equity (preferred and common) magically trades at the same price as the latest round. The Stanford study found all 135 unicorns evaluated were overvalued, with 65 losing unicorn status under proper analysis. Greisinger critiques unicorn index funds - specifically Prime Unicorn Index and Morningstar Pitchbook Index - for operating as black boxes without access to fundamental financial metrics like revenue, gross margins, cash burn rate, or path to profitability that standard valuation relies on. Drawing on 20+ years in venture debt lending, he explains post-money valuation was never intended as a market value proxy but rather a rough back-of-envelope approximation. Today's use by index funds, financial press, and analytics firms is, in his view, dangerous and fraudulent. He urges investors to demand transparent valuation methodologies and recommends avoiding unicorn index funds entirely until these firms disclose their formulas and subject companies to rigorous Stanford-style reanalysis.
Post-money valuation is the company value immediately after a funding round closes, but it completely ignores the terms, preferences, and rights granted in all prior preferred equity rounds. It falsely assumes all equity classes trade at the same price, creating a distorted picture that was never intended to represent actual market value, even when originated by venture lenders over 20 years ago.
The Stanford study found that all 135 unicorns examined were overvalued, and 65 of those companies (nearly half) lost their unicorn status - meaning they were no longer billion-dollar companies - when run through a proper valuation model that unwound all prior rounds.
Unicorn index funds lack access to actual financial statements and critical metrics including revenue and revenue run rate, gross and net operating margins, performance against forecast, monthly cash burn rate, and path to profitability - all information that would normally be used to value a company.
The black-box methodology obscures that these funds lack the fundamental financial tools and data needed to determine real market value, yet they ask investors to commit millions of dollars to high-risk private companies without transparency about how value is actually calculated.
Greisinger recommends staying far away from any index fund billing itself as a unicorn tech index, and proposes that index funds must disclose their exact valuation formulas and that all unicorn companies should be analyzed using the Stanford University model before being included in any index.
Our reviewer’s read on each dimension, with quotes from the episode.
The episode makes a few genuinely substantive points - post-money valuation was always a rough proxy, never designed to represent market cap, and the Stanford findings are striking - but the core argument is repeated three or four times with heavy filler and preamble, diluting the insight-per-minute ratio considerably.
The Post Money valuation was never intended to be used for the purpose that it is Today that is trying to come up with a market value um, for these companies
it was always considered a rough, uh, back of the envelope, uh, way to value a company and maybe was a very rough approximation of its future potential or future success. But in no way did it represent market value. Everybody knew that and no one tried to suggest that it was market value.
The practitioner angle - 'I was a venture debt lender for 20 years and we always knew post-money wasn't market cap' - is a mildly fresh framing, but the underlying critique is largely a retelling of the Stanford study without additional first-principles analysis or genuinely contrarian claims.
I have known about the concept of the Post Money valuation, that term, for more than 20 years during my time as a venture debt lender. The Post Money valuation was never intended to be used for the purpose that it is Today
in no way did it represent market value. Everybody knew that and no one tried to suggest that it was market value. Now in this era of unicorn mania, in this freak show, since well uh, 2013 really when the term was coined
This is a solo monologue episode with no guest; the host cites 20+ years in venture lending starting pre-bubble which is a legitimate background, but the episode provides almost no demonstration of that depth - credentials are asserted, not evidenced through nuanced practitioner insight.
As a venture lender for over 20 years, and I started in the business in 1998. So even before the Internet bubble
90 to 95% of all the deals we did, all the loans we made to these venture capital backed technology companies
A handful of concrete data points anchor the episode - the 135-unicorn Stanford sample, 100% overvaluation rate, 65 companies losing unicorn status, and WeWork's $47B valuation - but beyond these the episode relies heavily on generic assertions about financial metrics without named funds, dollar figures, or further named companies.
all 135 unicorns that were uh, evaluated in the study were overvalued. So 100% of the sample was overvalued
WeWork, which I analyzed in episode six, August 2020, there was no path to profitability for that company, and yet it had a $47 billion valuation, uh, and then dropped it, dropped it, dropped it before pulling its IPO in September of 2019
This is an unstructured solo monologue read from handwritten notes, with no guest, no probing questions, no follow-ups, and no productive tension; the host repeatedly loses his thread mid-sentence and the format adds zero conversational value.
let me, let me go to my notes here
Um, yeah, stay far away from anything. That's an index unicorn that bills itself as an index of unicorn tech companies.
Computed from the transcript - who did the talking, and the words that came up most.
UNICORN MANIA, The Real Facts About Post-Money Valuation Post-Money Valuation; The Facts It is absolutely NOT the market capitalization or market value of a tech unicorn company; PM Valuation completely ignores all the prices paid, preferences, and rights granted, for ALL prior rounds - a major flaw and a farce; Thus, a completely distorted picture of value is created by actually assuming that all of these past preferred rounds of equity, plus common, are all magically worth the same price as the round just completed. This is insanity; To make matters worse, The derivation of the PM Valuation is cloaked in secrecy - it´s a black box - you don´t get to see the calculation! Remember, from the Stanford Study, ALL 135 Unicorn companies evaluated were overvalued using the PM Valuation AND, 65 lose their Unicorn status! This is a 'Houston-we-have-a-problem' moment. If these statistics aren't an indicator that something is terribly wrong with the PM Valuation...well…then you are in Unicorn land. A Unicorn Index Fund is a Sham Given the above facts, the concept of a Unicorn Index, then, is a sham based on this faulty method of valuation.
Transcribed and scored by The B2B Podcast Index.
Speaker A: Foreign. Hello again everyone. Uh, welcome back to Distilling Venture Capital. I'm your host, Bill Greisinger. Um, as you are aware, Distilling Venture Capital is your podcast for fintech, blockchain, decentralized finance, digital banking, crypto, and all of the Web 3.0 technologies that are changing the uh, financial landscape globally. As you can see, I'm not in my um, my high tech fancy uh, studio in Ipanema. I'm at an undisclosed location in the Midwest. Um, but I, um, I wanted to change up the format a little bit since my last episode, which dropped on February 23rd. I'll have you encourage you to go back and listen to that. Also in the Unicorn Mania series, um, I wanted to start doing shorter videos, hopefully more frequent and more impactful to rein. And in this video I wanted to reinforce um, some of the things that were discussed in that last episode. Um, I made um, a whole bunch of notes here since that last episode that I want to go through with you today. Um, the episode 28 is the last episode. Like I mentioned, it dropped on February 23rd. So just over a month ago. Um, you can find it in audio on all of the major podcast platforms. It was my first video. So if you go to YouTube and in the search bar you type in Tech Unicorns are fake. So that's Tech Unicorns are fake. My video should be the first one that comes up. Um, but let's get into this episode because I did a lot of post episode notes, uh, uh, from that last episode of Unicorn Mania where um, you'll recall I went through the Stanford University study that uh, called squaring Venture Capital valuations with reality. And we talked about the uh, bogus improper notion of value that um, venture capital and the tech press and others are trying to use utilizing the Post Money valuation. And I just felt that it was important to come back to you in a shorter video to reinforce some of those points. And uh, I unpacked a couple of IT indexes, new and new unicorn index funds. Um, and I want to just reinforce some of the points, uh, there so that you understand uh, what's really going on in this, in this freak show. So let me jump into it. Um, so the Post Money valuation, I call it the real, the real facts around this, uh, nonsense, um, it is, uh, let me, let me go to my notes here. It is absolutely not the market capitalization or the market value of these tech companies. The Post Money valuation completely ignores, completely ignores all the prices paid, preferences and rights granted to all the prior preferred Rounds and common stock. And that's a major flaw, a major flaw identified in the study and I pointed out, um, related to this, um, bogus form of method of valuation that they use. So a completely distorted picture of value is created by actually assuming that all these past preferred rounds of equity plus common are all magically worth the same price as the round just completed. Uh, to make matters worse, the derivation of um, the Post Money valuation is cloaked in secrecy. It's a black box. You don't get to see the calculation. So remember two main things from the Stanford study and again you can listen to the longer episode to hear more detail on that. The two main things are this, all 135 unicorns that were uh, evaluated in the study were overvalued. So 100% of the sample was overvalued. That's number one. Number two, 65 of those companies lost their unicorn status. So nearly half of the sample loses its unicorn status, meaning they are no longer billion dollar companies after running through the Stanford model. So this to me, ladies and gentlemen, is a, uh, Houston, we have a problem moment. If these statistics and these metrics aren't an indicator that something is terribly wrong with the Post Money valuation, well, uh, I guess you're in unicorn land anyway. So to me, given the above, given these facts, a unicorn index fund is a sham. To me it's a farce. Um, the concept of a unicorn index fund assumes um, that, well, the reality is this, here's the reality, reality, here's what's going on here. These indexes in fact do not have visibility into the required information and data usually used to come up with the market value of a company. Uh, I. E. How about financial statements? They don't even have that. That's why they use this inappropriate, um, and discredited Post Money valuation and then try to sell it to you as some rigorous proprietary methodology. And it's complete bs. So since the index funds, they have limited information in these private companies, again no financial statements, they're trying to triangulate, if you will, um, evaluation from not only incomplete information, but um, a methodology that's completely improper as the Stanford study points out. Um, and further, as I thought about this and was making additional notes, uh, let me let you in on a key piece of information here, a key fact. Um, I have known about the concept of the Post Money valuation, that term, for more than 20 years during my time as a venture debt lender. The Post Money valuation was never intended to be used for the purpose that it is Today that is trying to come up with a market value um, for these companies. So let me explain that a little further. As a venture lender for over 20 years, and I started in the business in 1998. So even before the Internet bubble, um, 90 to 95% of all the deals we did, all the loans we made to these venture capital backed technology companies, normally in 90, 90, 95% of those cases they had to raise an additional round or two of capital before they paid off our loan. Because these are companies that are burning through cash every month in most cases. And so under our loan we had a very comprehensive loan and security agreement because we were a secured lender. So in the loan agreement they were obligated to provide us with the details surrounding any new capital raise. And often when they did that the management teams and the investors alike would tell um, us in that process, M um, they would tell us that the post money valuation after this round is X, right? So we knew how it was calculated and we always knew that this was not the real market value um, for the company, uh, because of all the terms and conditions in the prior rounds, um, were different. And so it was always considered a rough, uh, back of the envelope, uh, way to value a company and maybe was a very rough approximation of its future potential or future success. But in no way did it represent market value. Everybody knew that and no one tried to suggest that it was market value. Now in this era of unicorn mania, in this freak show, since well uh, 2013 really when the term was coined, unicorns, tech unicorns, a venture capital backed company with a billion dollar valuation or more, the way it's being used today is dangerous in my view and it's even fraudulent. The idea that index funds, the financial press, the analytics companies and others, uh, have been trying for years to this represent, use uh, this as a representation of value as insane. And it's wrong. So the question I have is why would anyone invest in an index fund that can't provide investors with a true picture of value? Any index fund should be required and investors should demand that the valuation methodology be disclosed. Right? Makes sense. One would think that disclosing your valuation methodology would be a strength, a positive to show that you do have rigor and uh, um, and determination of value. Transparency in that regard should be an asset, not something to be avoided. So instead these so called index funds use stealth M methods and means, uh, because they don't want you to know, they don't want you to know that they don't really have visibility and the tools normally utilized, like financials to, uh, actually determine real market value for these private tech firms. Um, so, you know, my first question is why the secrecy in the black box approach if the index funds are asking investors to pony up millions of dollars to get exposure to, um, this private tech company asset category. Um, you know, think about it. The risks of an early stage or growth stage private technology company are high enough and significantly high based on their performance, which is not proven or disclose. To gain exposure to this high risk asset category via an index fund, um, with a completely improper and bogus notion of value is insane. So my, my recommendation to you would be. Let me, let me go to my notes here. Um, yeah, stay far away from anything. That's an index unicorn that bills itself as an index of unicorn tech companies. Um, let's understand what's really going on here. I mentioned they don't have visibility under the information one would normally use to value a company or the tools. What am I talking about? Um, here's what you would get from, um, actual financial statements, monthly financial statements, quarterly and annual. Um, how about the firm's actual revenue and what we call its revenue run rate? Um, so these index ones have no sense of what the aggregate monthly and annual revenues are and the growth rate of revenue. Um, how fast is the company growing month over month? How fast are revenues growing? That's one. Um, more importantly, more importantly, no sense of the firm's gross margins and net operating margins. Right. Is there a path to profitability, uh, anywhere in the future? If, uh, we go back to WeWork, which I analyzed in episode six, August 2020, there was no path to profitability for that company, and yet it had a $47 billion valuation, uh, and then dropped it, dropped it, dropped it before pulling its IPO in September of 2019. Um, regarding gross margins, and I'm not going to try and get into many accounting terms here, but that is the first order, first level of, um, profit margins that you look at in a firm. The gross margins in a firm, um, are. A firm's gross margins reflect basic survivability. Right. And again, these index funds have no access to that. The things we would normally use to value a company like you, like a public company. How about the firm's performance to plan? How are they doing against their forecast? Again, they don't have that. Um, the firm's monthly cash burn rate, that was one of the biggest measures, the highest weighted measures in our risk rating system in the venture lending space was the monthly burn rate. In other words, liquidity Runway, how many months of cash based on your burn rate every month you have left in the bank. Um, that gives us an understanding of when you run out of cash and when you have to raise more capital from your investors. So each of these above financial metrics, again if you look at um, um, comparables and um, valuations, um, uh, let's just take software firms for example. You'll see uh, so many times you'll see software firms valued, ah, on a multiple of revenue or a multiple of ebitda, which is kind of a proxy for the net operating margin, uh, or proxy for cash cash flow. Um, you will see multiples of those because you have the. And it's not, by the way, it's not black box, it's available for everyone to see. When you see a multiple, you can go calculate it for yourself from the publicly available financial statements. Um, each of these above financial metrics that I've just mentioned would normally be used to value a firm and measure its financial health, uh, and trajectory. These so called index funds do not have access to any of this information and therefore operate in a vacuum when it comes to relying on real financial metrics normally used to value a company. So my view is investors should be fully aware, fully informed of how flimsy, um, how flimsy and flawed these valuations are based on this bogus post money valuation. Um, so I don't want this to get too long. I wanted to come back with you or to you with that information. Um, as I thought about the last episode, um, I've got an idea and a request for um, um, the Prime Unicorn Index or the Morningstar Pitchbook Index. How about this? How about you just show us exactly how you're calculating the value of these companies. What are you doing? Show us the formula. It shouldn't be secret. Um, this should be something that should be divulged as a matter of course. So again, my recommendation is stay far, far away from anything billing itself as a technology or an index of technology unicorns. Because remember, ladies and gentlemen, this guy here, um, yeah. Fake. Right. Most children know that. Most children know that this guy's not real. Um, I don't know. Not so much. Not so much for the VCs in Silicon Valley and, and uh, this whole circus around, this whole circus around, um, technology unicorns. The, um, my recommendation, and I'm going to finish with this because I don't want this video to get too long, is I believe one the, the, these index funds and all the others who are calculating, um, values of these tech companies based on post money valuation should, should disclose how they're doing it. And number two, I think a requirement is all of these, all of these companies should be run through the Stanford University model squaring venture capital valuations with reality because it could it unwound all of the prior rounds to cut to arrive at a true value for these companies. It's, it's time consuming and more rigorous but it's the way to show the value of the companies. Right. And so I think I'm going to leave you with that. That should be the recommendation. Um, in my next episode which I hope to get out in less than a couple of weeks, I want to dig into for you the ftx, uh, the uh, crypto exchange company uh, that imploded back in November last year. Get into that. And I would also like to touch upon the uh, Silicon Valley bank situation and tell you what's really going on in um, what happened in that case and what's going on in the banking industry in general. So remember, unicorns aren't real. Tech unicorns aren't real either. Neither one. Um, they're pretending. Um, I think I'll end it with that. That's enough for today but I thank you for your time and stay tuned for the next edition. And I'm m going to get into some other areas like FTX and Silicon Valley Bank. Stay tuned. Thank you very much for joining me for this edition of Distilling Venture Capital. I hope you enjoyed the episode. Thank you. Sam M.
Episode 028 - UNICORN-MANIA; Tech Unicorn Valuations are FAKEEpisode 027 - Jonathan Hung, Angel Investor - Los Angeles, CAEpisode 026 - Alex Branton, Partner Sturgeon Capital, LondonEpisode 025 - João Zecchin, Founder Fuse CapitalEpisode 024 - Slater Victoroff, Founder & CTO Indico