Beware the Unfettered Valuation
To our Valued Investors:
These are exciting times in the pre-IPO universe and throughout the second market landscape. While it’s always invigorating to live in “exciting times”, though, your friends at Iron Edge VC will always opt to do so with equal measures of enthusiasm, caution, and prudence.
Toward the end of the last decade, a company called WeWork (later rebranded as The We Company) was regarded as a sparkling gem among private businesses. The office-sharing outfit helmed by the eccentric Adam Neumann was known for its shiny product, namely, the opportunity to rent workspaces that boasted amenities like lunch and learn sessions, midday yoga breaks, and craft IPAs flowing through communal taps free of charge. Outside investors, expecting continuous growth, drooled over the prospect of owning a little We before the company took the step of conducting an IPO. Pre-IPO facilitators, though, experienced a great deal of frustration fielding these requests because We Company shares were notoriously difficult to procure. What’s more, nobody at Iron Edge VC thought it was a good investment idea. The ranks of cap table benefactors included some impressive names, most notably Japan’s SoftBank and its nearly $20 billion stake, that had elevated The We Company’s valuation to a hard-to-justify $47 billion. Why was it hard to justify? Because The We Company leased almost everything it needed to operate, including real estate. They owned very little, and they were leveraged to the hilt. What we saw was a 47-billion-dollar idea, and it was an idea that could be easily replicated at that. In retrospect, the funding history looks like a harebrained experiment that was intended to re-enact the Hindenburg disaster as seen through a private equity lens.
The skyscraper of cards came tumbling down in 2019 after a failed IPO attempt. Your weekly Iron Edge newsletter told of The We Company’s spectacular and very public downfall (WeWork’s Big IPOoops, October 3, 2019). Admittedly, we experienced much more relief than empathy. While it pained us to witness the embarrassing clearing of such a prominent pedestal, we were overjoyed that we did not allow any of our clients to wind up holding the WeWork bag. Most recently, the Special Purpose Acquisition Company (SPAC) BowX Acquisition inked a deal to take The We Company public at a comparatively modest $9 billion valuation.
As we watched WeWork crash and burn, almost everybody swore that they had seen it coming, and that they had learned a valuable lesson in the process. That lesson, about the virtue of justifying a company’s valuation before plunking down your hard-earned dollars, unfortunately appears to be fading from many investors’ consciousness at an alarming rate. To this day, we routinely witness good, and even great, companies mutate into grossly inflated valuation behemoths courtesy of boundless investor appetite. The phrase we prefer to employ is “chasing a stock”. Even as we will do our best to facilitate any private investment for which we hear a request, we never look away from our obligation to focus on maximum potential gains for our clients. The pre-IPO space is, thankfully for us, much en vogue today, but we will not allow that to distract us from the hard truth that bubbles tend to burst. As strange as it may seem to hear this from a purveyor of pre-IPO investments, our duty is to execute our craft in a clearheaded fashion. Iron Edge VC is, of course, not without its competitors. The crucial difference is that while some may tirelessly push the companies with the biggest “wow” factors (i.e. the “easiest” sales) that will bring in a fast front-end buck, we opt for the ones that have a lot less room for implosion. We want every one of our deals to end with an incentive for the investor to come back for more.
At the beginning of last month, we received several calls from people who wanted to get their hands on some Coinbase before that company’s public debut. We conducted the obligatory investigations, and consistently found that the best we could do for buyers would be somewhere in the range of $525 to $575 per share. We even heard stories of people who had paid up to $600 for this one. This would value the company well over $100 billion. While we understand the allure of cryptocurrency, we are also leery of that market’s extreme volatility. Furthermore, could Coinbase really be worth more than General Electric, or almost seven times the value of United Airlines? We weren’t convinced, and we didn’t consummate a single Coinbase deal. Coinbase went public via direct listing in mid-April (Nasdaq: COIN) with a first print of $381, and it managed to break $400 on Day One. It softened quickly, though, trading as low as $250.51 last Thursday. As a direct listing, COIN isn’t subject to insider lockup restrictions but still, those who are “long and wrong” by a factor of more than 50% must be feeling a bit queasy by now. Once again, we are happy not to have that on our collective conscience.
Our intention here is not to disparage Coinbase or, for that matter, WeWork. Our function is not to evaluate or criticize the face value of someone else’s business. We’ve traded on Coinbase, we’ve rented temporary WeWork offices, and both delivered their products to our great satisfaction. What we take very seriously, though, is the valuation. If we can’t make good sense of it, we can’t get too jazzed about the investment.
A few months ago, one company that was in great pre-IPO demand was Rubrik, Inc., a cloud data management company based in Palo Alto, California. Iron Edge’s research team spent much time delving into any information we could find on Rubrik, and we liked what we saw from the beginning. The valuation at the share price we could offer rested just below $3 billion, a number with which we felt very comfortable for such a big player in an increasingly relevant market. To our chagrin, the offers at hand were pulled and the second market pricing in Rubrik ran away before we could put buyer and seller together. Such is a rare occurrence, but it happens. Today, for no reason other than a dramatic shift in supply and demand, Rubrik’s current valuation is nearly twice what it was when it slipped through our fingers. Nothing about the company’s fundamentals has changed since the beginning of last winter. Do we still believe that Rubrik is a fine cloud storage data management company? Yes. Do we wish we had closed the deal in 2020? Of course. Are we willing to chase this stock? Not so much.
Our reaction to a missed opportunity doesn’t involve tears, it doesn’t involve spite, and it most certainly doesn’t involve recklessly investing our clients’ funds. We react with ingenuity. We react with eyes wide open. We react with SkyKick. Seattle’s SkyKick, Inc. is, like Rubrik, a cloud data management company. In their own words, they “build cloud products that empower IT providers”. In other words, SkyKick organizes and streamlines cloud storage, a function that is indispensable for all kinds of businesses worldwide. A recent Iron Edge newsletter went into greater detail about SkyKick’s workings (“‘Scuse Me While I Kick the Sky”, March 24, 2021), but here we will express more succinctly what drew our attention to the company. Rubrik’s sandbox is among the large-scale enterprises. Their success depends on snagging pieces of the largest businesses’ storage budgets. There’s great money to be earned that way, but it is in a crowded arena that Rubrik competes. SkyKick, on the other hand, aims to take care of the small-to-medium-sized businesses (SMBs). SkyKick faces little competition for SMB dollars, and those plentiful SMBs offer an abundance of revenue opportunities. Presently, more than 20,000 IT partners across the globe are accelerating their cloud business with SkyKick. While Rubrik makes a big splash pursuing the most prominent accounts, SkyKick is quietly benefitting from their mission of catering to the multitudes of the underserved. SkyKick has a strong management team in co-founders and co-CEOs Evan Richman (Berkeley, MIT Sloan, Microsoft) and Todd Schwartz (MIT Sloan, Deloitte, Accenture, Microsoft), and the company has very enticing growth prospects. The big, fat, glistening cherry on top, for us at least, is the valuation. We can offer SkyKick in the low- to mid-$300 million range — that’s “million” with an “M”. This one clearly does not currently reside in the “unfettered valuation” column. This is how Iron Edge VC believes that thoughtful investing will ultimately benefit our clients. SkyKick is, of course, privately held, and as such its shares cannot be purchased at the stock exchange. Still, we can provide you with access to our fund that holds shares of this company and many others that are blessed with justifiable valuations. If you would like to learn more, or if you know anybody else who would, please don’t hesitate to contact us by clicking “Get in Touch” below.
If you have enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.
As always, shares are available on a first come, first served basis.
All Our Best,
Paul Maguire, Managing Partner and The Iron Edge Team