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The Relationship Between Public and Private Markets Valuations

A few days ago, I wrote about the importance for startup CEOs to have certain level of familiarity with public market dynamics. Apparently, the blog post sparked some very interesting debates about the relationship between public and private markets dynamics.  So it’s time to follow up with a new post ;)

While public and private markets operate under fundamentally different models they also share a lot of commonalities. More importantly, public and private markets influence each other through different elements, the most important of which tends to drive entrepreneurs crazy and puzzle the minds of investors: COMPANY VALUATION. Let’s take a look at a couple of recent examples about the relationship between public and private markets.

Private Markets Influencing Public Markets: Spotify, Pandora and Unicorns

Last week, music service Spotify announced that it is raising $400 Million at a $8.4 Billion valuation. The result of the announcement had an immediate impact rival music service Pandora which shares rose almost 4%.

pandora

Pandora’s stock behavior during last week is a classic example of how a private market valuation can influence a public market stock. Pandora’s current market cap is about $3.5 billion. Although puzzling, the reasoning was very simple.  People likely did the math and applied Spotify’s value to Pandora, which if it were Spotify, would be valued at about 2.5x its current price, theoretically putting the company’s share price closer to the $42 levels it traded at in the past.

The Unicorns Example

Is just been a quarter since the start of the year but it’s pretty obvious that the number of public offerings has slowed down compared to previous years. Among other reasons, investors believe the recent high valuations in private markets has something to do with that. Investors often refer to that phenomenon as “the unicorn effect”.

ipos

Unicorns is a recent term used in the technology industry to refer to companies like Uber, Slack, Dropbox, Pinterest, etc that have are currently valued over $1 Billion Dollars. Years ago, public markets was the only available vehicle to achieve those valuations. Today, the large amount of private funds available have allowed the unicorns to hit valuations that will be hard to live up to in an IPO offering. As a result, those companies have decided to stay private impacting the current IPO climate.

Public Markets Influencing Private Markets: The Box and Dropbox

The public-private market relationship is completely bidirectional. A great example of this is how IPO valuations influence private market valuations. Let’s take Box and Dropbox as an example.

Enterprise software company Box went public a few months ago at an astonishing $2.7 Billion market cap. The public offering came right after a private round of funding that valued Box at $2.4 Billion making the IPO not a great return for the lead investors in that round. Box is often compared with rival Dropbox which current private valuation is bordering the $10 Billion mark. Even though Dropbox doesn’t seem to be currently raising a new round, it is pretty obvious that any new valuations will be inevitably compared against Box’s current market cap.

The previous examples illustrate some of the tangible relationships between private and public markets. While both type of markets operate under different models, they are inevitably linked by the dynamics of valuations.

 
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Posted by on April 15, 2015 in Uncategorized

 

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Why Startup CEOs Should Understand Public Markets

Uptrend stacks coins,on the financial stock charts as backgrou

A few days ago, during a dinner with a few experienced tech executives, we had a super interesting discussion about the current state of the public markets and its relationship with the venture industry. One of the topics we were debating was the value of understanding and following the state of public markets as an entrepreneur and CEO of  a private company.

The discussion was particularly interesting to me as I have been advocating the value of knowing to speak the language of public markets for private company CEOs. In my opinion, understanding the dynamics of public markets can be incredibly useful for a variety of reasons:

Understanding of Public Market is a Very Useful Skill

Socks, bonds, options, etc are statistical principles that describe the state of a company, industry, a country or the entire world. Understanding those principles can result incredibly beneficial during negotiations with potential large customers or investors. Whether you are a technologist, business person or an investor, I’ve found that understanding the language of public markets tends to be a very complementary skill that can become helpful is various situations.

VCs Often Use Public Market Information to Calibrate Private Market Valuations

If you are raising money for your startup, it doesn’t hurt to validate the current state of public markets. Whether you like it or not, venture capitalists (VC) typically look at public market valuations as a way to calibrate the valuations of their investments. This is particularly true if your company is on a trajectory to go public at some point.

Public Market Downturns Affect the VC Industry

Public markets are the ultimate representation of an economic downturn. The indicators of difficult economic times ultimately affect the VC circles. If you were around during the 2000s or 2008 crisis, you might remember that it was impossible to raise a round of VC funding regardless of the quality of the investment.

Public Market Investors are Becoming More Active in Private Markets

In the last few years, a number of hedge funds and private equity firms have started to make inroads in the vC market. Those public market investors are typically lured by the opportunity to invest in fast growing private companies before a potential public offering. As a result, many startups are now raising institutional rounds from traditional public equity investors. In those circumstances, the understanding of public market dynamics can result incredibly helpful.

These are just some of the reasons why I believe developing an understanding of pubic markets can be incredibly valuable in your career. At the end, public markets are a language that you should know how to speak and that will expand your perspectives of your work, industry and even your life.

 
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Posted by on April 3, 2015 in Uncategorized

 

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Some Thoughts About the Box IPO

Cloud storage company Box debuted in the public markets last Friday with a strong performance that pushed the price per share to $23.23 which represents an astonishing $2.7B market capitalization. The Box IPO represents the successful conclusion of a process that started last year when the company filed its first S-1 but later delayed the process to correct some of the concerns expressed by investors and analysts while also wait for a friendlier IPO climate.

All things considered, the Box IPO has been both incredibly successful and very atypical. Talking to a few friends about the IPO on Friday evening, we dicussed a few points that I thought would be interesting to summarize in this blog post.

The Risk of Raising at a Sky High Valuation

After retracting from its initial intentions of going public in 2014, Box raised $150M at a sky high $2.4B valuation. While the Box traded slightly over that valuation in the initial day, some of its investors are not yet seeing great returns based on the last round. In that sense, this is a great example of how, sometimes, raising at incredibly high valuations can fire back on investors looking for 2-3x returns.

Box-Info-Graph

It’s All About Going Fast

The Box IPO clearly puts the company as one of the market leaders in the cloud storage category which is getting increasingly competitive and commoditized. Since the early days, Box has done a masterful job accelerating customer acquisition, sometimes at the expense or revenues, to create distance between them and the incumbents in the space. Box’s relentless pursue of growth should be an example to follow by all startups in high growth enterprise software categories.

Profitability Matters

The market reaction to Box’s initial S-1 was far from warm. The company showed revenues at $124M  with losses at $168M which represented an increase from the year before ($112M). After the initial filing, Box updated the S-1 showing strng progress closing the gap between revenues and expenses and a clear path to profitability. As much as we reward growth in the enterprise software world, it is important to remember that profitability is a super important criteria for a strong performance in public markets.

Price Low

The initial price of $14 share proven to be correct for the Box IPO in this climate and Box ended up raising $150M with this initial public offering. This price highly contrast with Box’s initial S-1 with which the company was hoping to raise $250M. Similar to other IPOs like ZenDEsk, the strategy of pricing reasonably low mitigates any investor anxiety for the first weeks of trading.

Enterprise Software Continue to Perform Strong

Prior to the Box IPO, there was a lot of skepticism within the VC community in terms of the future of enterprise software IPOs. Similar to the Facebook phenomenon in 2013, a weak IPO for Box could close the window for enterprise software companies eyeing a public offering in the next few months. Thankfully, Box performed incredibly strong and the IPO window remains open for enterprise software companies.

 
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Posted by on January 26, 2015 in Uncategorized

 

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Miami Gets Hot with the eMerge Americas Conference

emerge2This week I had the opportunity of delivering a session at the eMerge Americas Conference in Miami Beach. This time, my session wasn’t focused on technical or market analysis topic. Instead, I joined Michael McCord (CEO of Learner Nation) to speak to the audience about the experience of building companies in South Florida and other interesting topics related to the emergent tech startup scene in Miami.

The session at the eMerge Americas Conference was a very important moment for myself and the KidoZen team. Two years ago, my good friend, the legendary founder to Terremark and now Medina Capital Many Medina told me about this crazy idea of organizing a conference that will put the Miami and Latin-American startup scene on the map. Since then, I’ve seen the Medina Capital team and other folks work tirelessly to build what became the eMerge America Conference. The forum brought together a diverse group of personalities from tech visionaries such as Paul Maritz to celebrities like PitBull.  I am certainly very proud that the KidoZen team had the opportunity to contribute to this conference and can’t wait to get involved in the next edition.

In terms of my session, Michael and I explored different topics related to the dynamics, challenges and opportunities of building companies in South Florida. Our moderator did a phenomenal job focusing the discussion on aspects such as access to talent, raising capital, the relationship with Latin-America or comparisons with other startup hubs which are, not only relevant, but also incredibly unique to the Miami startup scene. Even though is always a nice feeling to have a packed room for your session ;). This time was incredibly gratifying to see how engaged and knowledgeable the audience was about the topics we were discussing. These are exciting times for the MIA tech scene.

Here is a picture taken during our session courtesy of my good friend Adriana Cisneros

emerge

 
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Posted by on May 8, 2014 in Uncategorized

 

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How to Run a Board Meeting: The Slide Deck

A few weeks ago, I blogged about my first board meeting as a CEO of a venture backed company. The response to the blog post was great and I received a few emails asking me to share more details. In that sense, I decided to put together a template of the slide deck I am using during board meetings.

The purpose of the board package slide deck is to provide a clear summary of the current state of the company including the major milestones achieved and challenges faced since the previous board meeting. CEOs should use the slide deck as the main vehicle to drive the discussions during the board meeting and it should be structured in a way that prevents unnecessary discussions that might derail from the main goals of the board meeting. In order to present the current state of the company, CEOs should give clear metrics about the main areas of the business: finances, sales, business development, product, team, marketing, etc.

While preparing for my first board meeting, I looked at different recommendations to structure the slide deck but, at the end, decided to create a specific structure that work for our investors. Even the slide deck template before might result as a good reference, I suggest you do the same and try to find the flow and structure that works for your company.

I hope this helps. Let me know your feedback.

 
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Posted by on March 20, 2014 in Uncategorized

 

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Back To Work: About New Year’s Resolutions

nyeThe entire KidoZen team is back at work this week and I never seen this level of excitement. Obviously, we ended the year with a very good momentum and have super ambitious and really exciting plans for 2014. Like most people, I spent part of my holiday break reflecting about 2013 and setting the goals and plans for 2014.

During that time, I was super happy to discover that I hit over 85% of my 2013 goals, had some pleasant successes in areas I didn’t  plan for and I still manage to do a decent  job on the resolutions I didn’t accomplish. While 85% might not seem particularly impressive, my satisfaction comes from knowing that my 2013 goals were super ambitious. At the end, I believe that’s the only way to set goals.

From New Year resolutions to our monthly/weekly plans at KidoZen, I like to evaluate goals based on the following rule:

  • Accomplishing Over 90% of the Goals: Probably our goals are not ambitious enough
  • Accomplishing Between 75% to 90% of the Goals: We are doing well, let’s keep pushing to get close to 90%
  • Accomplishing Under 75% of the Goals: We are doing something wrong, time to reassess.

As always, the key to accomplish goals is to stay really focused, iterate and adapt.

In terms of my New Years Resolution, I have some super ambitious goals both personally, for my family and I can’t not even tell you about some of the crazy goals we are trying to accomplish with KidoZen. It should be fun ;)

 
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Posted by on January 6, 2014 in entrepreneurship, leadership, startups

 

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Enterprise Software Lessons: Selling Top-Down vs. Bottom-Up

ABCEnterprise software sales are always a difficult task for a startup and something that is fundamentally different from the consumer market. Traditionally, enterprise software sales developed a reputation for being a long and bureaucratic process. However, recent technology movements such as the consumerization of IT, the popularity of open source technologies or the emergence of mobile devices have opened new avenues for products to get into the enterprise.

When thinking about selling to enterprises, there are two main models that will dictate the core of your strategy.

  • Top-Down Sales: Some products get sold directly to a decision maker like a Chief Information Officer(CIO) or Chief Marketing Officer(CMO).
  • Bottom-Up Sales: As an alternative to the top-down sales model, some technologies have the capability of getting adopted within enterprises by non-decision-makers such as developers or information workers before they make all the way to a decision maker.

While the top-down approach have been the cornerstone of enterprise software sales for decades, bottom-up models are a result of the new movements such as the consumerizaiton or IT or the democratization of software. As any new and evolutionary model, it’s very tempting for startups to try to embrace a bottom-up sales model. However, it’s important to realize that both models have very well defined strengths and weaknesses and, more importantly, they have a profound impact in the structure of your sales organization.

Top-Down Sales

This model is great for generating revenue from every single customer. Additionally, a top-down sales model is essential to land large deals that need that become strategic to your customer.

The top-down sales approach typically comes at the cost of longer sales cycles that require a well-established sales force. Additionally, achieving relevant market share with this model is extremely resource intensive as your sales force needs to be involved in every deal.

Bottom-Up Sales

The bottom-up model is great for achieving volume and spread your footprint within a wide customer base. This model does not typically require a large sales force and guarantees that your sales executives only get involved with a prospect after they have evaluated the product and are truly interested.

While achieving customer volume is great, the bottom-up sales model does not necessary conduct to revenue and might put you in a situation of supporting thousands of non-paying customers. The tech startup scene is full with stories of companies that were able to attract a massive number of non-paying customers before going out of business. More importantly, embracing a bottom-up approach requires a level of scalability that can become resource intensive for any startup.

Top-Down Does Not Mean Free

When embracing a bottom-up sales model, it’s important to realize that the model doesn’t necessarily require to offer a free entry point to the product (fermium). While fermium models makes a lot of sense as a top-down approach, there are plenty of scenarios on which enterprise software startups can charge a small nominal fee as a starting point.

Deciding whether to adopt a top-down or bottom-up sales model is essential to structure your sales organizations and customer acquisition processes. For some products, top-down and bottom-up approaches are mutually exclusive. However, technologies like Box, AWS, MongoDB have proven that you can effectively developed both sales models achieving large market share while also acquitting paying customers.

 
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Posted by on December 23, 2013 in Uncategorized

 

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