Venture Capital

WeWork's Collapsing Valuation in Context

WeWork’s calamitous IPO process may have moved into a new phase on Friday, as news reports claimed that the company is considering a valuation as low as $10 billion. That’s a far cry from an initial target of $47 billion—a figure that would match the company’s post-money valuation at the time of its most recent venture financing in January.

A lot has been discussed about WeWork in recent weeks. There are vocal critics who say that the company is a disaster—that it is massively overvalued, its governance practices are irresponsible, and its pathway to profitability is hopeless. Others say that the WeWork is deeply misunderstood and that the company is a disruptive innovation. Some say WeWork is not even a tech company; others say it is.

There is good reason to believe WeWork has a challenging path to profitability, that the company is overvalued, and that its public offering is in jeopardy. I don’t want to rehash all of that today. Instead, I’ll illustrate the (allegedly) remarkable collapse of WeWork’s valuation and place it into a broader context with other companies.

To begin, let’s quickly review WeWork’s fundraising history. The table below shows equity financing rounds beginning with its first seed financing in October 2011 up to the pending initial public offering that was first announced in August. I excluded the $3 billion in SoftBank secondary share purchases and at least $1.8 billion in non-convertible debt.

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Included for each funding round are the deal date, amount, post-money valuation, total equity capital raised to date, and invested capital multiple. The “IC Multiple” is calculated as post-money valuation divided by capital raised to date. It can be thought of as a rough measure of gross returns (or capital efficiency if you like) since it’s a ratio between the value of the company and the capital it has raised to get there (“money out / money in”).

As WeWork raised more capital, the company’s valuation grew—and from the beginning through Series E, the valuation grew faster than did the amount of capital going in. This is visualized by the IC multiple, which increased from 3.9x at Series A through the peak of 10.2x at Series E. After that, its valuation continued to grow (numerator), but at a slower pace than the amount of capital going in (denominator)—hence, the falling multiple (ratio). This also meant that, relative to the past, WeWork had to give investors a higher share of the company for each dollar coming in (a lower price).

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A falling IC multiple is not uncommon among middle-to-late stage companies that raise a lot of capital. To put things into context, here is WeWork’s IC multiple alongside of a few comparable companies—three that went through an IPO already (Lyft, Snap, Uber) and one still privately-held company that is on its way to a public offering (Airbnb).

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All but one company follows a similar pattern—growth in valuations that outpace growth in capital invested (an increasing IC multiple) from Series A through Series D-E, at which point things flip as companies raise increasingly more capital ahead of an IPO. Lyft is the exception here as its IC multiple held relatively flat throughout.

So, WeWork’s falling IC multiple on the way to an IPO is not unusual, and in fact, it moved relatively steady compared to both Snap and Uber—both had large drops in IC multiples after Series E, before trending slowly down from there towards IPO.

What’s unusual about WeWork is what’s happening right now. Let’s zoom in a bit from the chart above and look at total capital raised, post-money valuation, and the IC multiple (the ratio of the two) for WeWork under the announced $47 billion valuation, the rumored lower valuation of $10 billion, and the actual figures for the IPOs of Lyft, Snap, and Uber.

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The initial target post-money valuation of $47 billion at IPO would produce an IC multiple of 5.6x, making WeWork the star of the group. However, if WeWork were to go public at a $10 billion valuation, then the IC multiple plummets to 1.2x—a middling return over the life of the company. For WeWork to achieve a multiple equal to the three-company average of 3.3x, it would have to reach a valuation of $28 billion. That seems unlikely now.

One question that rises to the surface is: is WeWork is too late in getting public? Given the beating that tech stocks like Lyft and Uber have taken in public markets since their IPOs, it’s fair to ask if investors are simply getting ahead of what’s to come. But even there, WeWork looks like an underperformer overall.

If one were to construct an “alternative IC multiple” which takes market capitalization of each of Lyft, Snap, and Uber today, and places that over their capital raised through IPO, they would still outperform what’s shaping up for WeWork—Lyft’s multiple would fall from 3.3x to 1.8x, Uber’s from 3.2x to 2.4x, and Snap’s would increase slightly from 3.3x to 3.7x. I realize these are not perfect comparisons, but they are directionally correct.

As far as I can see it, WeWork looks like a company that has been overvalued in private markets—particularly of late. Public markets look unprepared to continue that trend. Look no further than this Wall Street Journal article on Friday that shows SoftBank is prepared to prop-up a significant portion of the IPO. That’s wouldn’t happen if investor demand was there. It’s fair to question if the IPO happens at all. UPDATE (Sept 17): hours after this posted, the company announced plans to delay the IPO until at least next month.

WeWork wasn’t always this way. Throughout much of its lifecycle, the company exhibited rather modest growth in valuation to capital injection ratios. That changed dramatically in the last few years as SoftBank started pumping large quantities of equity and debt into the company, and gobbling up shares held by earlier investors and employees through secondary transactions. An examination of the data suggests the final round of financing in January—where SoftBank singlehandedly doubled the amount of capital raised by the company and doubled its valuation—is what may have thrown the whole thing off.

That brings me to who wins and who loses. I don’t have the full details, but my best bet is that early investors and employees will generally be just fine—many of them hedged their bets already through secondary sales, and what’s left of their shares will still be well in the black. It probably means that some people are a little less rich than they thought they’d be—that sucks on a personal level but its not a disaster either. A number of late-stage investors will sustain losses, but these are isolated to large institutional investors.

SoftBank, of course, looks like the big loser here. Not only did it single-handedly account for most of the latest-stage capital going into the company through both debt and equity—including the big round in January which may have undermined the entire pathway to a smooth IPO—but it also made a staggering $3 billion in stock purchases via secondary transactions. For more on what that means for SoftBank, read this from Chris MacIntosh.

VC: An American History (Book Review)

Seemingly everyone in my network has been busy the last few weeks reading Secrets of Sand Hill Road: Venture Capital and How to Get It, the highly anticipated book by Andreessen Horowitz partner Scott Kupor that published last month. By all accounts, it’s an excellent guide for helping entrepreneurs and other onlookers understand the practicalities of the venture capital business. I look forward to reading it soon. I, on the other hand, have been focused on a very different type of book on the venture capital industry. VC: An American History is a fascinating tour of the genesis and evolution of the venture capital business, spanning more than 200 years of development. The book was written by Tom Nicholas of Harvard Business School and released just one day before Secrets of Sand Hill Road. I have been eager to get my hands on this book since first learning about it months ago, and I’m happy to say, it didn’t disappoint.

Silicon Valley VCs are investing more in European startups

Silicon Valley investors are growing increasingly interested in Europe. That’s the main takeaway from this Sifted Chart of the Week. Last year was a record year for fundraising by European startups with €20.5bn (£18.1bn) spread over more than 3,300 deals. And it came with an increasingly US flavour.

The 1% (of VC)

In the last year, I have written about the increasing size of venture capital deals across the round stages (see here, here, here, and here). Today I’ll take a closer look at that the top of the distribution by examining the share of venture capital dollars in U.S. startups captured by the largest one percent or five percent of deals each year.

The analysis shows that in spite of the impressive growth in venture capital deployment across all deal sizes in recent years, the biggest deals are driving the trend. The largest five percent of deals now account for more than half of venture capital deployed—twice as much was the case just a decade and a half ago. In the last few years, the trend has been driven entirely by the top one percent.

How venture capital mega-rounds obscure improving gender diversification of startup founders

Today, I’m going to publish headline numbers of venture capital investments ($) by founder-gender type. I’m doing this for two reasons. First, while my study provided some important new information, headline numbers of capital invested is what clicks in most people’s minds for “what’s going on” (I disagree). Second, I want to point out that looking at headline numbers of capital investments might obscure a truer picture of a diversifying founder base because giant funding rounds are dominating VC markets.

To test this idea, I pulled annual figures for venture capital deals and capital invested by round size (<$50M, $50M-$99M, $100M-499M, and $500M+) and gender dynamics of founders (women-only, mixed gender, and men-only). What my analysis shows is that mega-rounds ($100M+) are male-dominated and drowning out some promising gender diversification going on for companies in-line with historical venture capital activities.

Women-Only and Mixed-Gender Founding Teams are Driving New Venture-Backed Startup Activity

Two weeks ago, I published a new report for the Center for American Entrepreneurship, titled The Ascent of Women-Founded Venture-Backed Startups in the United States. I followed-up with a summary on this blog last week.

One criticism of the report is my definition of “women-founded”. For reasons I explain in detail in the report’s methodology, I chose “women-founded” to indicate a company that has at least one verified female founder. That means it includes startups with all-women founding teams and teams with both women and men (coincidentally, it also means that I assume that companies with missing founder information had no women founders—more on that in a second). A key reason for not separating these groups was needing a bigger pool of companies to draw from in order to credibly track outcomes over time—and there just weren’t enough of them in the mid-to-late 2000’s to do that. There were tradeoffs.

However, that does not prevent me from more narrowly segmenting these groups here and demonstrating first financing trends only across the four types of founding teams in the dataset—women only, men only, mixed gender, and missing gender. To begin, the first chart here displays the raw numbers of annual first financings for startups falling into each of those four founder-gender categories.

Lagged Deals and the Dynamic Nature of Venture Capital Databases

Venture capital databases are not perfect. One of the key problems is their dynamic nature. New information is coming in all of the time. Early-stage activity in particular is systematically lagged until additional rounds are raised (either because the earlier rounds were unpriced or because they were unannounced). For this reason, I try not to report data too recently from when the deals are to have occurred.

New Study on Women Founders

Last week, I published a new report for the Center for American Entrepreneurship, titled The Ascent of Women-Founded Venture-Backed Startups in the United States. The study is the culmination of months of research and collaboration with some amazing friends at the National Center for Women & Information Technology and beyond.

The Rise of Global Startup Investors

Recently, Brad Feld and I have been working hard on The Startup Community Way, a book on how to harness the complexity in the entrepreneurial age. It’s a follow-up to Brad’s, 2012 classic: Startup Communities. We completed a chapter that documents the growth of startup activity globally over the last decade—from startup deals to investors to startup programs—but recently decided to scrap it from the book. But, we wanted to put those data points to use, so I’ll publish some of them here.

(Note: if you want a comprehensive look at trends of venture deals, see Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital, a report I published last September with my friend and colleague Richard Florida. It covers a decade of venture capital deals across more than 300 global metropolitan areas that span 60 countries.)

Here, I’ll document the rise of three types of investor groups: venture capital firms (from Seed through later-stage VC), corporate venture capital groups, and a third group for accelerators and incubators. These groups have been pre-populated by PitchBook, my source in this analysis.

Time to Exit

I’m currently putting the finishing touches on a new study about women-founded venture-backed companies in the United States. One of the things I looked at is exit rates—the share of companies either being acquired or doing a IPO—by the gender composition of founding teams. A colleague who reviewed a draft of the study challenged me on the eight- and ten-year exit lag from first financing because the time to exit has gone up in recent years. That’s a fair point, but I only have data going back to 2005 (the oldest first-financing cohort in my data), which constrains my ability to look over longer time periods. It is still an important exercise, and most critically, the results of the comparative analysis between women-founded and non-women-founded companies wouldn’t change much by having more data. And, that’s what I’m most after in the report.

But that did get me to thinking: just how much longer is it taking for venture-backed companies to exit?

How the Geography of Startups and Innovation Is Changing

We’re used to thinking of high-tech innovation and startups as generated and clustered predominantly in fertile U.S. ecosystems, such as Silicon Valley, Seattle, and New York. But as with so many aspects of American economic ingenuity, high-tech startups have now truly gone global. The past decade or so has seen the dramatic growth of startup ecosystems around the world, from Shanghai and Beijing, to Mumbai and Bangalore, to London, Berlin, Stockholm, Toronto and Tel Aviv. A number of U.S. cities continue to dominate the global landscape, including the San Francisco Bay Area, New York, Boston, and Los Angeles, but the rest of the world is gaining ground rapidly.

Solving Canada’s startup dilemma

Canada, we increasingly hear, is becoming a global leader in high-tech innovation and entrepreneurship. Report after report has ranked Toronto, Waterloo and Vancouver among the world’s most up-and-coming tech hubs. Toronto placed fourth in a ranking of North American tech talent this past summer, behind only the San Francisco Bay Area, Seattle and Washington, and in 2017 its metro area added more tech jobs than those other three city-regions combined.

All of that is true, but the broader trends provide little reason for complacency. Indeed, our detailed analysis of more than 100,000 startup investments around the world paints a more sobering picture. Canada and its leading cities have seen a substantial rise in their venture capital investments. But both the country and its urban centres have lost ground to global competitors, even as the United States’ position in global start-ups has faltered.

Thoughts on the New Jersey Innovation Evergreen Fund

On October 1st, New Jersey Governor Philip Murphy announced a $500 million plan to increase venture capital investment in the state. The move is motivated by New Jersey’s decline (relative to other states) in venture capital investment the last decade, and his belief that an expansion of publicly-subsidized venture capital pools will help turn things around.

Information on the plan is still sparse and there are a lot of details that need filling in. But that’s precisely why we’re speaking up now. The details really matter here—history is littered with failed government venture capital programs that didn’t get the specifics right. So, Governor Murphy, if you’re listening, we’d like to share some ideas with you as your plan begins to take shape.

Early-Stage Valuation Multiples Are Coming Way Down. What Does it Mean?

Earlier this year, I wrote about the declining number of early-stage venture deals and in the number of startups entering the venture-backed pipeline in the United States. As I think about the overall health of American entrepreneurship, this development raises some questions. Is the early-stage decline driven by factors on the supply-side (investors) or the demand-side (startups)? Or is it both? Does it reflect an overheated market simply returning to normal, or are other factors at play? As one example, is this evidence of winner-take-all markets, whereby fewer startups get funded, but those that do raise ever more capital? Is it something else? Is it all of these things? And, should this concern us?

Platform Giants and Venture-Backed Startups

A friend recently pointed me to a July study by Oliver Wyman titled Assessing the Impact of Big Tech on Venture Investment. I was immediately intrigued because this is a question I’m asked all the time and one for which I don’t have a good answer. On the one hand, I see how platform giants could expand startup activity because they seed an ecosystem, improve labor quality, and provide capital (as customers, investors, and acquirers). On the other hand, I see how their sheer dominance—and the ability to leverage their power into adjacent markets by favoring their own content or wares—makes it difficult  to compete in their space. In fact, reporters have told me that most VCs won’t touch startups operating anywhere near these companies’ orbits, a phenomenon that is apparently so common it’s been given a nickname: “kill-zones”. I took a close look at the numbers to try and figure out what’s going on.

Startups Move to The Bay Area for Good Reason, but That Advantage May Be Waning

We've heard it in startup communities everywhere—while it's become increasingly likely for high-potential companies to get started most anywhere, the best ones often leave for Silicon Valley. One of the most commonly-cited reasons is that Valley investors require companies to move. That may be true, but perhaps it's for a much bigger reason—because doing so is beneficial for these companies. But, what do the data say? Jorge Guzman of Columbia University attempted to answer this question in a research paper: Go West Young Firm: The Value of Entrepreneurial Migration for Startups and Their Founders. Here’s what he found.