The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:21:19 · Harry Stebbings, Luca Ferrari
[00:21:19] S1: How do you think about pricing these assets? Because, know, I'm in early stage venture where we all lie and say that price doesn't matter where it still does matter, by the way. But price really matters when you're you. How do you price these assets? [00:21:32] S0: The theory is simple. Now applying it successfully is difficult. Before you were asking me, how are you different from a private equity? And I said the biggest difference is that we are incredibly hands on product technology operators. So it's not just a financial play. The other big difference is that we acquire to hold forever. We never sell. I I won't say it will never happen. It may occasionally, but it's it's never happened to any of our significant assets. And so we we buy to retain for potentially decades. The the way we value these assets is consistent with this. We don't speculate as a private equity typically would on what the, you know, price earnings multiples or EBITDA multiples could be once I sell it in four years, you know. We literally just look at free cash flows. So we project free cash flows for as far as in the future as we can, discount them, and so it's an IRR NPV calculation that informs our willingness to pay a certain price. Again, that's... In financial theory, that's pretty straightforward. The difficult part is how do you project that accurately? That is devilishly difficult, of course.
00:21:32 · Luca Ferrari, Harry Stebbings
[00:21:32] S0: The theory is simple. Now applying it successfully is difficult. Before you were asking me, how are you different from a private equity? And I said the biggest difference is that we are incredibly hands on product technology operators. So it's not just a financial play. The other big difference is that we acquire to hold forever. We never sell. I I won't say it will never happen. It may occasionally, but it's it's never happened to any of our significant assets. And so we we buy to retain for potentially decades. The the way we value these assets is consistent with this. We don't speculate as a private equity typically would on what the, you know, price earnings multiples or EBITDA multiples could be once I sell it in four years, you know. We literally just look at free cash flows. So we project free cash flows for as far as in the future as we can, discount them, and so it's an IRR NPV calculation that informs our willingness to pay a certain price. Again, that's... In financial theory, that's pretty straightforward. The difficult part is how do you project that accurately? That is devilishly difficult, of course. [00:22:36] S1: And the hard thing is you've got to make the seller wanna sell at the price. Actually, you know, it's like secondaries today, is there's a big chasm between what what the buyer's willing to pay and what the seller's willing to sell at. How do
00:22:36 · Harry Stebbings, Luca Ferrari
[00:22:36] S1: And the hard thing is you've got to make the seller wanna sell at the price. Actually, you know, it's like secondaries today, is there's a big chasm between what what the buyer's willing to pay and what the seller's willing to sell at. How do [00:22:47] S0: you find seller response to your pricing analysis? So we we don't really convince anybody to sell. These people are always adults, generally highly competent, intelligent professionals who have their own clear view of value. What we try to do is be quick and decisive in determining our price. We try to make an offer that's not a bluff, it's an actual very good offer and close to the maximum we are reasonably willing to offer. If they don't like it, we we walk away. But historically, we have never lost a process. Meaning, every single time there was willingness to sell and we had a chance to bid, because sometimes you don't get to know about the opportunity and you only hear about it after the deal is done. Every single time, to my knowledge, our offer ended up being the highest. One reason could be we're terrible negotiators. Another reason is because of our model and being so operationally involved and trying to improve the product, the operations, the marketing, the monetization, everything so deeply. It's a lot of work. You don't scale it as quickly as buying just from a financial point of view would, but you can unlock more efficiencies. And therefore, you can offer a better price.
00:22:47 · Luca Ferrari, Harry Stebbings
[00:22:47] S0: you find seller response to your pricing analysis? So we we don't really convince anybody to sell. These people are always adults, generally highly competent, intelligent professionals who have their own clear view of value. What we try to do is be quick and decisive in determining our price. We try to make an offer that's not a bluff, it's an actual very good offer and close to the maximum we are reasonably willing to offer. If they don't like it, we we walk away. But historically, we have never lost a process. Meaning, every single time there was willingness to sell and we had a chance to bid, because sometimes you don't get to know about the opportunity and you only hear about it after the deal is done. Every single time, to my knowledge, our offer ended up being the highest. One reason could be we're terrible negotiators. Another reason is because of our model and being so operationally involved and trying to improve the product, the operations, the marketing, the monetization, everything so deeply. It's a lot of work. You don't scale it as quickly as buying just from a financial point of view would, but you can unlock more efficiencies. And therefore, you can offer a better price. [00:23:57] S1: I'm I'm a venture investor for my sins. I quite enjoy financial engineering. When you think about, like, the the weight of capital, how do you finance the acquisitions? Is it on, like, raised capital? Now, obviously, you've raised. Is it on debt capital that then you have very low cost of capital on? How do you think about efficient use of cash for acquisitions?
00:23:57 · Harry Stebbings, Luca Ferrari
[00:23:57] S1: I'm I'm a venture investor for my sins. I quite enjoy financial engineering. When you think about, like, the the weight of capital, how do you finance the acquisitions? Is it on, like, raised capital? Now, obviously, you've raised. Is it on debt capital that then you have very low cost of capital on? How do you think about efficient use of cash for acquisitions? [00:24:14] S0: So that certainly is pretty, you know, common playbook. Equity for sure, most of it has been retained earnings. We have raised, I think, a remarkably little equity relative to our financials and our valuation. But really up until Evernote included, which is a year ago, I can... On first approximation, I can say that all what we have done, we have done through our own earnings and debt. Prior to Evernote, we had raised a little bit of equity, but it was almost immaterial in the grand scheme of things. Now, more recently, we have raised more equity, roughly $200,000,000 over the past ten months. But again, I think most of it is our own cash flows and and debt. [00:24:54] S1: When you think about the deals that you've done, have you mispriced any? And in the ones that you mispriced or misjudged, what did you not see that you should have seen or would like to have seen?
00:24:54 · Harry Stebbings, Luca Ferrari
[00:24:54] S1: When you think about the deals that you've done, have you mispriced any? And in the ones that you mispriced or misjudged, what did you not see that you should have seen or would like to have seen? [00:25:04] S0: There hasn't been a single one we have priced correctly. Thankfully, we have made mistakes in both directions. So sometimes things went better than we thought and sometimes they they went less well. Probably the most significant problem or or error we've made in the... Particularly from the the downside negative point of view has been to project future rates of user acquisition too optimistically. Of all the important KPIs in determining the success of a product, I would say rate of user acquisition is the hardest to project accurately by a huge margin. It's happened multiple times. At least once we were way too optimistic with that and the ultimately, the returns from the acquisition turned out to be much, much worse than we had anticipated. [00:25:49] S1: Why is rate of user acquisition so tough? I'm sorry to ask, but they tend they tend to be quite baked assets. You've got historical data. You've got very baked customer acquisition channels. Why is it so variable and volatile to predict?