Private Market Valuations Exceed IPO Valuations: Is This a Bubble??

private-company-valuations-temp-112614-4Brokerdealer.com blog update inspired by 2 Jan WSJ column by business news journalist Liam Denning

For broker-dealers, investment bankers, and those following the investment strategies of private equity and venture capital firms, this is one of the better plain-speak summaries profiling the current climate of investing in private companies. The recent outsized valuations during 2014 have caused greybeard investors to scratch their heads…as the outsized pre-IPO valuations are counter-intuitive to traditional investment analysis of private companies, particularly given the assortment of “lower-than-last-private round” post IPO valuations that these same companies are being given in the public marketplace.

For private companies that wish to network with deep-pocketed angel and/or institutional investors, Brokerdealer.com provides an investor forum that connects start-up entrepreneurs with those who can see the forest through the trees.

Below please find excerpts of Liam Denning’s reporting..

Buying a stock, with all its attendant filings, analyst coverage and forecasts, still can be a gamble. So imagine getting excited about one isolated price signal on a private company with all the disclosure of the Air Force’s Area 51.

Yet that is what is setting pulses racing as 2015 dawns. Xiaomi, a closely held Chinese smartphone maker, recently raised $1.1 billion at an implied valuation of more than $46 billion. That puts it ahead of Uber Technologies, the unlisted ride-booking application developer that got new funding in December valuing it at $41 billion. Both numbers also are higher than the market capitalizations of roughly three-quarters of the S&P 500’s members.

In theory, such startup valuations matter little to anyone but a relative handful of founders, employees and venture capitalists. The average investor doesn’t get a seat at the table or more than an occasional glimpse of what even is on the table.

In practice, news of such amazing, and seemingly unobtainable, investments stoke bullish sentiment, leaving individual investors potentially vulnerable.
Venture capitalists and other insiders usually do extensive due diligence before committing to the likes of Uber. But their basis for valuation differs from the approach of mainstream investors buying stocks, with venture funds also considering exit timelines, the cash needs of a startup to keep expanding and maintaining incentives for management and owners as equity stakes get parceled out. They also can, of course, just get things wrong.

Ordinary investors also must consider the wider context. In a world thirsting for yield amid ultralow interest rates, money has sought riskier corners of the market. Almost $24 billion of new commitments flowed to U.S. venture funds in the first nine months of 2014, according to the latest data from Thomson Reuters and the National Venture Capital Association. That is more than in each of the preceding five years in their entirety and sets up 2014 to have been the biggest year for new venture money since before the financial crisis.

This raises the risk of dollars being deployed into questionable businesses, which then eventually find their way into the wider market via initial public offerings, which are priced off the back of those high startup valuations.

For the entire WSJ story, please click here.

Startups Bypass BrokerDealers and Investment Bankers

154012464-304BrokerDealer.com blog update courtesy of extract from Jan 2 WSJ story by Telis Demos

Wall Street is dealing with new challenges in one of its bedrock businesses, taking young companies public, as more startups choose to stay private longer.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

Initial stock sales are still thriving, despite the big private companies that have held out on an IPO. This past year was the biggest for U.S.-listed IPOs since the dot-com peak in 2000.

But the trend of companies staying private could present longer-term problems for banks. If companies delay or avoid going public, it could threaten the fees and other relationships—with investors, hot young companies and wealthy executives—that banks get from working on IPOs.

Some Wall Street firms are responding by beefing up their teams that work on the private deals, which also gives the firms another chance to build links with startups that may do an IPO later. The private deals could also generate a new stream of fees before the eventual IPO windfall.

“It’s obvious why banks are ramping up for more private offerings,” said David Erickson, a former banker who is now an operating partner at venture-capital firm Bessemer Venture Partners. But because company executives “have already met a lot of public investors by that time, the pitch for bankers is likely more challenging,” he said.

For the full WSJ story, please click here.

BrokerDealers Help Mint Billionaires in 2014; Greed Is Good, Funding is Fun

startup valuationsBrokerdealer.com blog update courtesy of extracts from 29 Dec edition of the Wall Street Journal, with reporting by Evelyn M. Rusli

As brokerdealers, investment bankers, institutional investors and entrepreneurs “close the books” on 2014, all will agree this has been a remarkable year in which “billion dollar valuations” have seemingly been the norm. Most notably, technological start-ups have enjoyed increasing valuations with each subsequent round of financing from private equity and venture capital firms, albeit many financial industry professionals are wondering whether those valuations can carry over when these private companies embark on initial public offerings (IPOs).

While “Wall Street” protagonist Gordon Gekko coined the phrase “Greed is Good!,” the Broker-Dealers mantra for 2014 was “Funding is Fun!”

Below please find highlights of the WSJ article.

Chinese smartphone maker Xiaomi Corp. is now officially the world’s most valuable tech startup, worth $46 billion—the exclamation point on a year of extraordinary valuations. Continue reading

BrokerDealers and Buyside: Bitcoin Coming to A Screen Near You

Brokerdealer.com blog update courtesy of extract from Traders Magazine, the leading publication within securities industry’s sell-side (otherwise known as the universe of registered broker-dealers). Coverage for this story provided by TradersMag writer Gregg Wirth. Visitors to this page who may wish to know more about brokerdealers and institutional investors having an interest in bitcoins are invited to search the brokerdealer.com database.

bitcoinBitcoin, the crypto-currency that initially became infamous as the tender of choice for drug traffickers and mercenaries, may be coming to a trading desk or institutional portfolio near you – and sooner than you think.

“2014 is going to be the year Bitcoin hits Wall Street,” said Barry Silbert, founder and CEO of SecondMarket, a capital-raising platform for private companies and investment funds. Indeed, there is a growing consensus in some corners of Wall Street and the buyside community that the $7.8 billion  Bitcoin industry is going to become the new, flashy darling of investors, with dedicated digital currency funds, venture capitalists and asset managers all chasing after those 12 million bitcoins currently in circulation.

“Digital currencies like Bitcoin are not going away,” Silbert explained. “And Wall Street and the regulators know this, they’ve studied how to deal with it, and now they are starting to understand its potential.” SecondMarket has gone heavy into the Bitcoin phenomenon, launching the Bitcoin Investment Trust, a $70 million open-ended trust that invests exclusively in bitcoins, as well as a dedicated desk of 10 traders who buy and sell bitcoins for the trust and other institutional clients. SecondMarket is also creating what it hopes to be the largest, best-capitalized and well-run Bitcoin exchange in the U.S., and is enlisting banks and Bitcoin-related firms to be exchange members. Continue reading

Venture-Capital Banking Deals of The Day; Tech Start-Ups Score Funding

BrokerDealer.com blog update:

Raising venture capital and securing start-up funding is in full swing in this year-round season as 3 more early-stage firms raised $50 million in financing this week courtesy of leading venture-capital firms Sequoia Capital, Greylock Partners, and tech titan Salesforce.com.

Cincinnati-based Lisner Inc., which specializes in audio-beacon technology and embeds tones inaudible to the human ear into digital media, received $3.5mil in funding from Boston-based Progress Ventures, Jump Capital, CincyTech, Serra Ventures and Mercury Fund of Texas. The company expects to have $1mil-$2mil of revenue this year.

Skyhigh Networks scored $40mil to fund growth for its IT service that detects, identifies, scores and controls cloud services..

Yik Yak, best known as a gossip-sharing app that lets users post anonymously to forums raised $10mil