BPN Feed

At the current postmoney valuation of $1.1B, virtualgoods.shop looks like an attractive equity investment, with about 40% chance of losing money but 50% chance of > 2x and 20% chance > 10x based on our judgments about its long-term outlook and how investors' confidence in that outlook may grow with milestones in the next 1, 2, and 5 years. See below for how we can frame that outlook to assess how changes in it might change valuation, especially at times when the company may raise additional rounds.

Our judgments for key drivers of long-term cash flow, such as those in the top half of the table below, drive 100 logical combinations of these drivers that flow through a complete cash flow sensitivity model to produce 100 cases for long-term cash flows. That enables handicapping the odds for actual cash accumulation over the long-term, which is the foundation for handicapping the odds not only for future fundraisings but also for the valuation that investors will pay at the time of those fundraisings. Drag the dot at the top of the table to explore more of the 100 cases and their odds. If you are viewing on a smartphone, flipping to landscape orientation may help.

We produced odds not only for actual cash flows over the long-term but also for investors' outlook for those cash flows at earlier horizons, such as at the time of a financing 1 year from now. In the chart below, hover over the rainbows to see our odds for different multiples, and hover over any of the 100 dots, each representing one case for investors' outlook in 1 year, to see a tool tip detailing the growth, scale, and profitability expectations in that outlook. If you are viewing on a smartphone, flipping to landscape orientation may help.

Because we debate explicit odds for future equity value and for future financings, we can make cap table waterfalls much more useful. As the odds for this company's future valuation and cash needs combine with its current cap table, unsurprisingly we see that preferreds have better upside / downside than common, but surprisingly we see that the existing Series E has better upside / downside than the new Series F whose preference is senior to it, with a much lower chance of losing money and an even higher chance of returning > 5x and even > 10x, for a mean return of almost 6x vs. the Series F at around 5x. The following few posts explore why.

Investors often use cap tables like the one below to do sensitivity analysis of each security's valuation for a range of acquisition exit valuations. The one below shows current prices of each security relative to issuance value, and we see that there was a down round, and the Series E trades below its preference, perhaps because investors expect to lose the preference in an IPO. To really compare each security's attractiveness, we should consider the odds of different exit valuations and whether an exit may bevia acquisition or IPO. We also should consider how future financings could change preferences and share count. It's impossible to know exactly what future financings will be, but have made it practical to handicap odds, so we don't need to know for certain because we can look at numerous probable scenarios. We do so in the next post.

Because we handicapped odds for future cash flow & valuation at each future year, we have odds for fundraisings that cash needs demand and that valuation can support. In the chart below, the lines represent 100 cases for this, with darker lines representing cases with higher enterprise value at year 5, and the rainbows show the odds of being below various levels each year. You can click any of the lines to explore what happens in this case, not only in this page but also in subsequent pages that detail the evolution of preferences, share count, and exit proceeeds. If you are viewing on a smartphone, flipping to landscape orientation may help.

In this case, enterprise value increases only modestly from $1.0B to $1.5B despite material additional fundraising > $500M over the next 5 years.

In this case, valuation is high enough to support the cash needs, producing issuance of a Series G and Series H after the current Series F, and even a Series I at year 5 if the company is not acquired in year 5. These new rounds are likely to be issued with preferences senior to the Series F.

In this case, fully-diluted common share count increases by 50% from shares issued not only for investors in new rounds but also to investors in previous rounds via their antidilution features.