5e989931719cae6a68d484f5 Tee Time

Tee Time at Topgolf?

Your friends at Iron Edge VC have told you about an amazing company called Topgolf a couple of times already. Did you pay attention? We hope you did, but here’s another chance in case you were preoccupied before. Please click on the titles of the old newsletters to catch up with the rest of us, and then we can move on to some new business which you will likely find quite exciting.

 In Topgolf: Your Pre-IPO Hole-in-One (June 20, 2019), we discussed Topgolf’s huge impact on the golf establishment, and on the game itself. We described a few of the amenities that one can find at a Topgolf location, talked about the company’s history a little bit, and expressed our excitement over Cowen’s upgrade of Callaway Golf (NYSE: ELY) based on Callaway’s 14% ownership of Topgolf.

 The article Topgolf: Game On (August 15, 2019) provided a look at Topgolf’s highly innovative technology. Microchips embedded in golf balls plus illuminated targets along the range to track those chips offer swing analysis with unprecedented detail. We delved into Topgolf’s most elaborate location (in Las Vegas, naturally), and we examined Topgolf’s expansion and revenue growth, which continue to accelerate.

 If you don’t want to do all that reading, please click here for a Topgolf promotional video that’s sure to get your pulse racing.

 So now that you’re up to speed, here’s the latest development. Two days ago, Reuters reported that Topgolf is in talks with investment banks about hiring underwriters for a 2020 IPO. As is usually the case, the article’s sources “cautioned that the IPO plans had not been finalized and requested anonymity because the matter is confidential.” Unsurprisingly, Topgolf exercised its right to not comment on the story for reporters.

  A Topgolf IPO would validate an assumption we at Iron Edge have been making for a long time. Presently, there are fifty-three Topgolf locations in the United States, three in Britain, and one in Australia. Your June 20th Iron Edge email told you that locations in Mexico, Dubai and Canada are in the works, as well as several additions in Britain and fourteen new American outlets. Oh, wait, scratch that. It’s only thirteen in the hopper for the U.S; Richmond opened a few weeks ago. So Topgolfs are popping up all over the place and at a fast rate. Iron Edge’s longstanding prediction has been that an IPO would be the logical means for funding this kind of growth.

 Any examination of a private company that seems to be a good IPO candidate should include discussion of that company’s valuation. The problem is that unless you are an executive with that company, or you do accounting work for the company, or you are a nosy janitor at their headquarters, you probably don’t have access to reliable financials. Whereas publicly traded firms are required to announce their earnings on a quarterly basis, and a public company’s market capitalization can be calculated by multiplying the last sale price by the number of shares outstanding, private enterprises are subject to no such transparency. Some resources that specialize in estimating private valuations employ available information tied to VC funding rounds, yielding figures that can serve as a decent guide, but they cannot produce hard numbers derived from up-to-date revenue statements. Different methods of calculating private value will, of course, produce widely varying results. The opinions can be billions of dollars apart.

 With this disclaimer out of the way, we would like to explain our approach to placing a valuation on Topgolf. It focuses mainly on the aforementioned investment by golf behemoth Callaway, a company with an unmatched understanding of the game. In December 2017, Callaway added to its Topgolf equity and valued its 14% stake at $290 million. This suggests a valuation for Topgolf of approximately $2.1 billion (because 14% of $2.1 billion is $294 million).

 Last year, when Cowen’s John Kernan raised his price target for Callaway, he did so with the Topgolf position in mind. Kernan paid attention to how many ribbons were being cut on new Topgolf locations, and how that has affected revenue:

YEAR                # OF LOCATIONS            REVENUE

2014                             10                         $165,000,000

2015                             28                         $300,000,000

2016                             33                         $500,000,000

2017                             38                         $850,000,000

2019                             57                         $1,200,000,000 (projected)

 See a trend forming? With 57 locations, revenue projections are estimated to be around $1.2 billion in 2019, representing a five-year change of 627%. John Kernan says that more additions could bring in $1.8 billion in 2020. This, he continued, would price the franchise at as much as $6 billion to $7 billion. Kernan’s reasoning is not difficult to understand. Each new Topgolf outlet, with a $20 million buildout expense, generates an average of $30 million in annual revenue. The great expansion is a lucrative endeavor, and Topgolf has stated its intention to establish seven to ten new locations per year until the count reaches 130.

 According to Kernan, Callaway’s 14% piece of Topgolf will be worth about $600 million by 2020. We’ll do the math for you again: 14% of $4.3 billion is $602 million. A $4.3 billion valuation of Topgolf would fairly set its per share price (with an established shares outstanding figure of 94 million) at $45.75.

 Again, putting a price tag on a private company is a complicated process that requires some level of creativity. It is not an exact science. The methods we have applied, while perhaps somewhat imprecise, are based on logic, sound reasoning, and the vast experience of our Iron Edge team and of professional stock analysts like Cowen’s Mr. Kernan. If the $4.3 billion projection and the $45.75 per share pricing seem at all ambitious, never fear. Iron Edge has access to Topgolf at a considerably lower valuation.

 In a more recent analyst opinion, Raymond James upgraded Callaway Golf last month, also basing its rationale on Callaway’s significant Topgolf holdings. They, too, raised their ELY price target with Topgolf’s growing location count in mind. In the past few days, Cowen and Raymond James have earned some level of bragging rights. Since the moment Reuters published its article about Topgolf’s rumored underwriter search, Callaway stock is up almost 11%.

 We at Iron Edge VC are extremely proud and excited to have pre-IPO access to the notoriously hard-to-find Topgolf shares. Our inventory has been established at a level considerably lower than the valuation projections you have just read about. If you would like to learn more about the pricing of Topgolf (including the valuation at which we can offer it to accredited investors), or if you know of anybody else who would, please do not hesitate to contact us by calling your Iron Edge representative or by clicking “Get in Touch” below.

As always, shares are available on a first come, first served basis.

5f6e0d464e388c4975685025 Paul Min

Paul Maguire

Founder And Managing Partner