Posts from Marketplace

Pollenware

Last week I wrote a post about Networks and the Enterprise and I mentioned that we had made two recent investments in networks that engage the enterprise and that I couldn't mention one of them.

Well happily I can talk about the other one today. Pollenware announced yesterday that our firm had led a financing round for their company. Here's the USV blog post on Pollenware.

Pollenware is a really cool kind of funding marketplace. I've mentioned that we like peer to peer lending both for consumers and the enterprise. Pollenware operates a similar but different kind of funding marketplace. It is a marketplace that connects suppliers and their buyers and conducts real-time auctions for accounts payable and accounts receivable payments.

If you are a buyer and want to make a little more money paying your invoices a bit more quickly, visit this link. If you are a supplier and want to get paid more quickly, visit this link.

The thing I like most about this idea is the virality of it. If you are a supplier and you are participating in Pollenware to get paid a bit more quickly, you can invite your suppliers into the marketplace so you can pay them more quickly too. The whole thing trickles down from the biggest buyers to the smallest suppliers. Pollenware has some work to do to make their marketplace scale from the largest to smallest companies but our investment is a signal that we are highly confident they can get there and we plan to help them out along the way with things we've learned working with other marketplaces and funding markets.

Pollenware is located in Kansas City, our second investment in the midwest in less than a year. We are finding lots of interesting networks and marketplaces all around the country and all around the world. The opportunities are certainly not limited to the bay area, boston, and NYC these days.

#VC & Technology

Pricing A Follow-On Venture Investment

Today on MBA Mondays, I am going to walk you through some math that our team does when looking at a venture investment in a company that is starting to scale its business.

Let's assume we have a portfolio company. I will call it fit.sy. It is a marketplace for fitness experiences. We invested in it last year as it was getting ready to launch. A year later the business is scaling nicely and needs more expansion capital. The founders don't really want to go out and do a fundraising process. So they have asked the existing investors to make them an offer for an internal round. They believe they need $3mm of expansion capital to get them to cash flow breakeven.

So now the VC firm (us) needs to figure out what is a fair price. So we pull out Google Docs and run some numbers. For those who didn't click on the link and see the spreadsheet, here are the numbers:

– fit.sy is on track to generate $10mm in gross transactions in 2011

– they operate on an all-in "take rate" of 9% so their net revenue in 2011 will be $900k

– they will have operating costs in 2011 of $1.5mm and they will lose $600k this year

– they plan to triple gross transactions in 2012 to $30mm and grow to $150mm in gross transactions by 2014

– they plan to do this while ramping operating costs to $3mm in 2012 and to $7mm in 2014

We lay all of those number out in a spreadsheet and then look for some multiples to apply to them to get to a sense of value. The two multiples I like to use for marketplace businesses are enterprise value/gross marketplace transactions and enterprise value/EBITDA. And the multiples I like to use are 1x gross marketplace transactions and 20x EBTIDA. These are for internet marketplaces that are growing fast and are category leaders.

I've observed these multiples over a long time, going back to eBay and Mercado Libre a decade or more ago. We keep a spreadsheet of all Internet marketplace financing transactions in our portfolio and also include transactions we are very familiar with. That spreadsheet validates these multiples again and again.

When using multiples, one question that comes up is "do we apply these multiples to the current year results (which are almost in the bag), the current run rate (current month X 12), or next year's forecast. My answer to this quesion is "yes." I like to apply these multiples to all three and then triangulate from there. The reason being that when markets are frothy, investors will often give a company valuation credit for the next year's forecast (meaning a forward multiple). But when markets are tough, the multiple will be on the last twelve months (meaning a trailing multiple). You don't know what kind of market you will find yourself in so you should look at the multiples in a number of ways and triangulate to get to a comfort zone.

We did this in our spreadsheet (just for the current year and the next year) for our two multiples (1xGross and 20xEBITDA) and we got to a range of valuations for 2011, 2012, 2013, and 2014. They are:

2011: $10mm to $30mm (midpoint $20mm)

2012: $30mm to $75mm(midpoint $52.5mm)

2013: $35mm to $150mm (midpoint $92.5mm)

2014: $130mm to $150mm (midpoint $140mm)

So that's how we think about valuation. The spreadsheet says that if the Company hits plan, it will grow from a valuation of $20mm now to a valuation of $140mm in three years. And if we invest at that valuation of $20mm, we stand to make 7x on our investment in three years if the Company hits plan. If we pay at the top of the valuation range right now ($30mm) and get out at the top of the valuation range in 2014 ($150mm), we stand to make 5x.

I believe 5x to 7x is a good return objective on a follow-on investment in a venture stage company that is scaling nicely. We look to make 10x on our initial investment but cut our return objectives back as the risk comes out of the investment. There is still a tremendous amount of risk in a follow-on investment of this stage (mostly related to executing, hitting plan, etc) and a big multiple is still appropriate.

So that's pretty much all that is involved. We talk this over with our entire team and decide what to offer and what our walk away price is. Based on this analysis, I believe our offer would be around $25mm pre-money, $28mm post-money. We might go up a couple million to get the round done but I think $30mm post-money would be as high as we would go. At that point, we would encourage the founders to go out and find new investors to price and lead the round.

#MBA Mondays