What really drives valuation for tech companies?

By Jason Busch and Richard Lee

Published in Spend Matters Pro – https://spendmatters.com/2014/06/11/what-really-drives-valuation-for-technology-companies-these-days/

We’ve always found the subject of valuation for technology companies a curious topic, one that we could probably bore too many people with during cocktail hour conversations. There are plenty of good authorities when it comes to tech valuation (some of the best research we’ve seen over the years comes from Pacific Crest) and nearly every sell-side analyst worth their salt has a theory or two on the topic. But ultimately, tech valuation is more art than science (remember the crazy theories during the last dot-com rush when eyeballs somehow served in place of real operating metrics?).

Corporate Inversion…

AbbVie

AbbVie’s $55BN  bid for UK drug maker Shire was approved, providing yet another footnote in the history of corporate inversion by the US companies largely motivated by an opportunity to avoid US corporate taxes.  The combined firm will move to UK, saving upwards of $8BN in US corporate taxes by some estimates.  While such a move certainly rubs policy makers the wrong way, in reality isn’t this a perfect case study in the free market economy?  People / companies have moved across state-lines for better opportunities so why not across country-borders in today’s global economy?  Some compare this to individuals denouncing US citizenship to save on personal taxes – I think that’s a bad comparable.  The latter is unthinkable, outrageous (I am an ex-military after all).  Cry of jingoism will not solve the problem – only permanent solution is to change the US corporate tax laws so that we can be competitive, on the level playing field with the likes of Ireland, etc.  It’s been a couple of years since Chicago lost Aon to UK (well-respected board members resigned in protest).  We were bracing for the same after Walgreens / Boots (UK) merger.  Fortunately, Walgreens announced that they are here to stay.  Every accretion / dilution model has a black-box, designed to justify “positive synergy” that may or may not come to fruition.  I am just trying to imagine how to build one for inversion tax savings…

EBONY Wealth Challenge Wrap-up, Part 3

Continued…

  • Stock up – this is a tip that I am not really sure if I agree with but here it goes.  A few well-selected stocks can give your portfolio a nice boost.  Just make sure you do your research.  A legendary mutual fund manager Peter Lynch once said, “before buying a stock, do as much research as you would normally do before buying a refrigerator.”  I personally like to leave this task to professionals, e.g. buy funds vs. individual equities but researching before pulling the trigger still stands true.
  • Raise wealth builder – use technology (websites, apps) to encourage financial literacy with your kids.  Create family budgets, set savings goals and teach children how to earn money and save.  Good habits in fiduciary responsibility early on will go a long way.

These are 9 tips from the latest issue of the magazine.  Which ones are you going to follow?

EBONY Wealth Challenge Wrap-up, Part 2

Continued…

  • Develop a side hustle – explore a field related to what you already do for a living to develop supplemental cash flow, e.g. teacher giving private tutoring sessions.  Obvious downside – what you gain in discretionary income, you will lose in available free time.
  • Find extra money at home – in addition to selling unwanted furniture, clothes, etc. at one of many popular sites, take a hard look at various services you have including cable and cell phone.  Everything’s negotiable – give customer service a call and ask if there’s anything they can do to keep you as a customer.
  • Develop passive income – somewhat related to the first bullet above, this entails creating multiple revenue streams that’s truly passive, e.g. does not necessarily depend on your time such as owning a rental property.
  • Save for retirement – company pensions are gone with the dinosaurs and you should not rely on social security for retirement anymore.  Take advantage of 401K matching if available where you work.  While many personal finance experts advocate 20% savings of household income, I’d say save something every month regardless of how small.  We all have to start somewhere.

What is Bitcoin? (part I)

Every semester, I take my students from Columbia College to Chicago Federal Bank’s Money Museum.  It’s a great experience for the students, and I also learn something new with every visit.  On our last visit, I pulled one of the PhDs aside (they all possess a doctorate degree in Economics) and asked, “what do you think about bitcoin?”  The presenter gave me a one sentence answer – it’s a safe haven for illicit traders.  Probably a little too harsh answer, so I did my own research.

  • What is bitcoin?  It’s a virtual currency created by an unknown Japanese programmer (only his pseudonym is known).  It’s not associated with any country or government, making it truly universal.
  • How does it work?  Every user has a “wallet” with a unique identifier.  While all transactions are recorded, user ID is kept anonymous (OK, so that supports illicit trade comment).
  • How  do I get bitcoins?  Various exchange sites / services let you buy and sell for cash.  You can also mine them (honestly I don’t get this concept).

To be continued…

EBONY Wealth Challenge Wrap-up, Part 1

As published in the most recent issue paraphrased….

  1. Get your mind right:  Wealth begins in the mind and ends in the purse.  If you want to earn more, you must learn more.
  2. Lower your bills:  Renegotiate the terms for your car note, cable bills, utilities and cellphone bills.  Be pleasant – everything’s negotiable.
  3. Automate:  Pay your bills automatically each month by setting up electronic withdrawals to eliminate late fees, avoid credit score issues and reduce postage costs.  And even if you are late, negotiate elimination of late fees.

To be continued…

SMB and Outside Capital

devil in suitAll my start-ups after Orbitz were boot-strapped, so I get rather passionate about this topic.  Whenever inquiries come in from small business owners regarding the logistics of getting outside capital – valuation expectations; how much control to relinquish; what changes in operating agreement are necessary; re-classing voting rights and shares; guaranteed distributions regardless of performance (sort of like Jay Cutler’s new deal); etc. – I ask one simple question.  Why do you think you need outside capital?  Often, I’m dismayed by the answers I hear back…  They range from funds for rainy days to taking money off the table for the founders.  One thing you need to realize, it’s irrelevant why you think you need outside capital.  Investors will only invest if prospects meet their investment thesis in addition to meeting a couple of crucial criteria.

  • Management team in place – if it comes down to poorer business model with great executive team vs. great business model with poor executive team, investors will always choose the former over the latter.  There’s no such thing as great business with poor management – it won’t last.  Lesson for business owners – choose your management team wisely as your business grows.
  • Scalable business model – investors will invest if exponential return in COGS investment can be forecasted, e.g. there’s significant operating leverage.  Whether the business is technology-based or processes-based, business owners will have to demonstrate that an investor do not need to continue to spend corresponding OPEX dollars in order for it to grow.

So really think about why you need outside money and what you will use it for before approaching / accepting the capital.  Besides, there’s some truth to old saying – taking VC funds is like making a deal with the devil – do really want or need to do that?

%d bloggers like this: