The Unicorn War will continue, more and more Super Unicorn will also be listed…
Editor’s note: This article is from WeChat public account “e-agent Internet overseas wealth management expert” (ID: iedaili), author An Zhen Capital | Yang Mulin, Chen Zhijie.
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During the long recovery period of the financial crisis, the unicorn wave swept the world. After the initial development, these enterprises will eventually mature into the market. Regardless of the performance of the US stocks listed in the first half of 2019 or the waiting list in the second half of the year, we can see that a unicorn dark battle is happening quietly. On the one hand, the Tier 1 capital market is eager to find the next global giant, and on the other hand the enthusiasm of the secondary market for the unicorn is fading.
In such a big environment, Chinese unicorn companies are undergoing a reshuffle of the capital market. In the first half of 2019, the IPO of the IPO was cold, the amount of fundraising fell by 63% compared with the same period of last year, the average financing amount of individual stocks decreased by 58%, and the break rate of new shares remained high.
From the rising and falling point of view, as of August 14, the number of Chinese unicorn companies running through the market is very small. Not only in China, but the global unicorns are not good. The unicorn frenzy has cooled down. The stocks of companies with poor profitability have plunged a lot. For example, UBER (NYSE: UBER), which is familiar to everyone, broke the first day of listing. The first day fell by 7.6%.
In the first half of the year, IPO2019 has increased more than Nasdaq
Data Source: Deadline is 2019/8/14, Choice data
1. Who is helping the unicorn IPO wave
The rush of the unicorn IPO wave is often forced by companies to gain liquidity to seize the track. Compared with the high threshold of listing in the mainland A-share market, the overseas market is a huge vault for these “naughty” newborn unicorns.
The large amount of cash flow required for business operations and the pressure from previous VC investors to seek capital realisation are prompting these companies to IPO as soon as possible, in order to open up funding channels to stabilize their position in the industry.
But actually, many unicorns who lack money have no IPO, but at least take the lead in preempting IPO quotas, which can provide diversified options for later financing operations. Weilai (NYSE:NIO) issued $650 million in convertible bond financing just four months after its listing. In the context of funds, the listing of unicorns is a way to constantly “transfusion” for themselves.
At the same time, crazy venture capital institutions and exchanges are also entering the unicorn war. China’s current concept boundary for unicorn companies is still vague. The number of Chinese unicorn companies released by a Chinese institution even exceeds the number of global unicorn companies issued by other institutions.
Why? Because the capital market is too “hunger”. Venture capitalists who have lost a lot of A-shares such as Baidu Tencent are eager to target a future giant. In their eyes, whether it is in venture capital or in the Pre-IPO stage, as long as the target is good enough, it can be a profit. As a result, the investment model of the big network has also emerged, and the rapid listing of the unicorn has become a bet on capital.
In addition, not only venture capital institutions are robbing unicorns, but exchanges around the world have also given a green light to their listings. From the science and technology board to the Hong Kong Stock Exchange, the policy changes of the New York Stock Exchange provided an accelerator for the listing of unicorns, and the clashes of China’s innovative unicorn companies.
The interaction between NYSE and Nasdaq executives and Chinese innovative companies has never been more frequent. The HKEx is also preparing for the second listing of Alibaba. The capital market is expecting the emergence of a giant IPO. In order to boost the activity of the entire IPO market, the listing of the future Super Unicorn will surely be the battlefield of major exchanges and venture capital institutions.
The capital market’s rule of survival and inferior jungle is cruel. Too many unicorns become monopodous after being listed. The most fundamental reason lies in the drawbacks of the valuation model. The false high valuation will only thunder. The rain is small and the unicorn valuation needs more rationality.
2. Valuation bubble for unicorn companies
2.1 Traditional valuation models are too ideal
The basic logic of the traditional unicorn valuation model is to assume that the post-investment value (PMV) is equal to the fair value (FV), and the unicorn enterprise valuation is equal to the latest financing price per share × total number of shares . For example, the famous American mobile payment company Square was valued at $6 billion after the E round of financing, and this figure was obtained by multiplying the price of $15.46 per share by the total number of shares issued by 388 million. This simple and rude mode has directly created a large number of “blood” listings of high-valued fake unicorns.
The biggest problem with this algorithm is that it is too idealistic, ignoring the barrier effect that investors continue to enter, and neglecting the special protection contract for each round of financing.
What do you mean? The more investors who enter later, the more stringent protection treaties the company will require, that is, the stock rights acquired by each round of investors are different, then the total number of shares will be subdivided, and it will be mixed into a simple summation. There is a problem.
At the same time, the price per share is a variable, and it depends on the right of this round of financing to investors. The better the protection for investors, the better the investor is willing to contribute. The higher, but the price is clearly not matched with the rights acquired by the previous rounds of investors. Therefore, aside from the profitability and fundamentals, the unicorn valuation calculated by the traditional valuation model does not have much reference value.
According to Strubulaev and Gornall’s paper Squaring Venture Capital Valuations with Reality, Square’s valuation calculated using this valuation method is overestimated by actual fair value by $17.1 billion because it is funded by E-round investors. It has a favorable condition that takes precedence over all previous shareholders.
From the perspective of the changes in the valuation after various rounds of financing, the fair value of the Square price per share after the completion of the E round of financing and the A round of financing has deviated by 175%. In the end, its listing price was only $9, which was 42% lower than the E round of financing.
In this case, the two professors established an option pricing model for contingent claims. The logic is to separate each round of financing and measure the final real value with its actual fair value.
Under this new valuation model, the average post-mortem value of 135 unicorn samples is overestimated by 48%. Under this result, half of the unicorns are not real unicorns, and their valuation It will be less than $1 billion, which is a good answer to the question mentioned above. The concept of the Unicorn is not clear or the most fundamental because there is no universal unicorn valuation model.
Table 1 Post-mortem value and fair value of 135 sample unicorn companies
Source: Squaring Venture Capital Valuations with Reality, Strebulaev and Gornall; several indicators are: post-mortem valuation (PMV), fair value (FV), PMV exaggerated FV Percentage (ΔV), PMV exaggerated percentage of common stock price (ΔC)
Figure 2 Unicorn Overestimation Distribution
Source: Squaring Venture Capital Valuations with Reality, Strebulaev and Gornall; ΔV = post-mortem value/fair value, indicating the extent to which the unicorn valuation is exaggerated
2.2 Special Protection Terms, the hardest hit area of the Unicorn valuation bubble
As mentioned earlier, unicorn companies have different conditions for attracting investors in various rounds of financing, and sign different protection treaties with investors. In the later stages of financing, especially in the Pre-IPO stage, the unicorns that investors seek are quick to cash in the first and second markets, so investors will have higher requirements for stock performance after listing.
Square provides a liquidation price of not less than $15.46 per share in the E round of financing, and the IPO price per share is not less than $18.56, otherwise the compensation mechanism is obtained. This is equivalent to an investor getting a put option and recovering the loss when the stock price falls. withIn the same year, when Space X was difficult to finance in the financial crisis, the issue of special rights stocks succeeded in raising the valuation by 36%.
The existence of special protection clauses directly affects the valuation of unicorns, providing many variables for its actual value, and it is necessary for us to see what clauses will affect the valuation and thus follow up Provide a reference when judging the valuation bubble of the unicorn company.
For early-stage investors, they certainly know that follow-up investors will have more favorable price guarantees, so they often ask for an IPO ratchet clause (anti-dilution clause) when investing in a company, thereby reducing the follow-up Investors enter a dilution of their equity.
The trigger condition of the IPO ratchet clause is that the IPO share price is lower than the investor price issue, and the pre-investor will receive the free stock provided by the company, thereby lowering the relatively higher average cost per share of the entry, so as to protect itself from Too much loss.
According to Stanford University estimates, under the IPO ratchet clause, a 1.2x ratchet (20% return on IPO) can increase the valuation by 56%, and if it is 1.25x ratchet, this number will exceed 75%.
For the unicorns in the late stage of financing, if more investors want to take over, they can only provide them with multiple priority stocks. The rights and value of this stock are much higher than ordinary stocks. It also gave birth to a special conversion immunity.
Special conversion exemption gives the option of converting the investor’s priority stock into the common stock. When the IPO income triggers the exercise point, the preferred stock will be converted into common stock, which also protects the late investors. The gains are not too low. Under the terms of the special conversion waiver, the valuation of the unicorn company will be raised by about 50%.
The tier 1 capital market is far more than just the two types mentioned. The unicorn provides financing to investors and the priority liquidation right has been provided to investors who have the right to quit when the company faces bankruptcy.
The higher the priority liquidation multiple, the more funds investors can make in this situation, the greater the overestimation of the unicorn valuation, and the 2 times priority liquidation multiple will make the unicorn estimate The value is expanded by 94%. The unicorn’s option pool is the “gray zone” of the existing valuation model. The stocks that the unicorns have left for equity incentives or other channels are not actually issued, but they are also included in the traditional valuation model.
2.3 Unicorn valuation trap, qualified IPO restrictions
Qualified IPO restrictions simply add a spell to the listing of the unicorn, specifying the latest time to market and where to go.
and thisThe terms have a great impact on the overestimation of the unicorn, because the signing of the company’s listing process is in the hands of venture capitalists. Unlike the impact mechanism mentioned above, under this clause, the unicorn enterprise Fair value will fall, and post-mortem value will be relatively overvalued.
At the same time, its impact on the fair value of the unicorn will rise with the actual value of the unicorn. For those super unicorns, the qualified IPO limit will increase its overestimation rate by about 50. %.
This principle is similar to the growth of the seedlings. The prescribed time-to-market is not conducive to a healthy and qualified IPO. Even if investors can effectively analyze and discuss the status quo, it will be a reasonable time to go public, but it is inevitable There will be irrational occurrences.
Stanford University analyzed the impact of qualified IPO restrictions on the ten most valuable unicorn companies, and the results show that this clause will greatly increase its overvaluation rate.
Figure 3 Impact of Qualified IPO Limits on Unicorn Overestimation Rate
Source: Squaring Venture Capital Valuations with Reality, Strebulaev and Gornall; several indicators are: post-mortem valuation (PMV), fair value (FV), PMV exaggerated FV Percentage (ΔV)
The problem of valuation returns to the most fundamental, or the irrationality and impetuousness of the capital market. In this wave, the unicorn company should expand its business territory on the one hand, and on the other hand, it must continue to acquire The support of the capital market, falsification has become another major driver of high valuation.
The blood monitoring company Theranos, which had been valued at $9 billion, once caused Silicon Valley and the world to end up being ruined by the regulators of technology and data fraud, and the business empire collapsed instantly.
For a long time in the future, the Unicorn War will continue, and more and more Super Unicorn will alsoWhen listed, unicorn companies need to constantly strengthen their core competitiveness to establish technical barriers, and investors need rational investment under reasonable valuation.