Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

The Real Lesson of the Snowflake IPO

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On Wednesday, Snowflake (SNOW) went public in one of the most highly anticipated IPOs ever. 

Snowflake is a cloud data platform that helps companies efficiently organize and analyze huge databases. The company’s revenue is growing at a rapid 133% year-over-year rate.

Snowflake’s IPO priced at $120 for a valuation of $33 billion. That alone made Snowflake the most valuable software company ever at the time of their IPO, according to Fortune.

There are two primary problems here for those of us who are “retail investors.” First, only well-connected investors got in at the initial $120 price. Demand for this deal was so high that shares opened to the public at $245 and were trading at $290 at 12:47PM EDT on Wednesday.

Snowflake trading for $290.98 at 12:47 ET on Sept. 16, 2020

So unless they happened to have a connection at a major investment bank or Snowflake, most investors probably didn’t get in at the $120 IPO price. Warren Buffett’s Berkshire Hathaway — and other well-connected firms — invested at that price. But the rest of us didn’t have that option.

The second problem is that on its first day of trading, Snowflake was already valued at more than a $60 billion market capitalization! As a comparison, Twitter currently trades at a market capitalization of $32 billion. It’s true that Snowflake is growing much faster than Twitter. But it also only has a fraction of the revenue which Twitter does and is currently losing a lot more money.

The issue is that this week is the first time most investors will get a chance to buy Snowflake shares. And it’s already worth more than $60 billion. Snowflake is an impressive and disruptive company, true. But at that high of a valuation, there’s only so much upside left (and quite a bit of risk). The biggest gains were already made by Snowflake’s early private investors. The public never got a chance to buy when it was still small. 

One more thing. In February of this year, Snowflake raised $479 million at a $12.4 billion valuation from private investors. What could have possibly changed between February and today that made the company 5x more valuable? I believe the spike can only be explained by the bubbly financial environment we’re in today.

Private markets are where tech growth happens

Snowflake isn’t the only hot tech company to IPO at a crazy valuation. Today it’s rare to see any hot tech company IPO at a valuation of less than a few billion dollars. Just take Uber’s IPO at an $84 billion market cap and how Facebook was worth $104 billion when it went public as a couple of examples. Those are monstrously large IPO valuations. And Snowflake is right up there with them.

Nowadays when a really hot tech company goes public, it’s often already a big and mature business. And the majority of investors’ gains were made in private markets.

This is one of the main reasons I continue to invest in private startups. It’s one of the only ways to get access to very fast-growing companies today. Of course, there’s also more risk involved in private markets. But that’s balanced out by the higher upside potential. Startup investing also requires a lot more patience than trading stocks — but in my experience that’s a benefit and not a bug.

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Learn How the Top VCs Choose Startups

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This week top-tier venture capital firm Bessemer Venture Partners released the original deal memos from some of their best startup investments.

These memos provide a fascinating look at how VCs operate, think and make investment decisions. Today we’re going to look at a few highlights from these memos. But I strongly recommend you read them all. 

First, let’s take a look at Bessemer’s memo for their initial investment in Twilio in November 2009. Today Twilio is a $33 billion publicly-traded tech stock. When BVP first invested, however, it was a tiny seed-stage startup raising money at around an $8.5 million pre-money valuation cap.

At the time, Twilio was only producing around $17,000 in monthly recurring revenue (MRR). The startup didn’t even have a dedicated sales team yet. But BVP’s deal memo gives us valuable insight into why the firm thought Twilio had potential. Here’s an excerpt from the “Product” section.

The Twilio product makes the process of building a voice application extremely simple for web developers without any specialized training or need to deal with telecom companies or specialized integration service providers. Similar to consumer web apps, customers can sign up for an account with Twilio, pick a phone number (or port over an existing one), learn the five simple building blocks that make up the basis of Twilio, and start building voice applications right away.

Today every VC firm in the world is looking to invest in cloud software companies like Twilio. But at the time BVP made this investment, it wasn’t so obvious. I recommend reading the entire memo, but here are my key takeaways on what makes a successful startup investment:

  • Serial entrepreneur founder
  • Highly scalable business model
  • Steady revenue growth
  • Strong technology
  • Opportunity to expand offerings

As we know now, BVP’s early bet on Twilio turned out to be a fantastic one. Twilio is one of the reasons that similar enterprise software deals today are raising money at far higher valuations than this company did back in 2009.

2010: BVP Bets on Shopify

In October 2010, Bessemer Venture Partners made a $7 million bet on a young company called Shopify. Today Shopify is publicly-traded and worth a mind-boggling $113 billion. It recently surpassed the Royal Bank of Canada to become Canada’s most valuable company. In other words, this is a deal memo worth paying close attention to.

When BVP invested back in 2010, Shopify was raising money at a $20 million pre-money valuation. The company had an impressive $5.5 million annualized revenue run-rate. And it showed strong organic growth. 

Today, a $20 million valuation for a similar deal would be considered unbelievably cheap. Out of the thousands of deals I’ve seen, only one comes close (and it’s probably my best investment). 

One of the big reasons BVP got such a bargain price is because Shopify is headquartered in Ottawa, Canada. Most venture capitalists are based in Silicon Valley. And they only invest locally. So because BVP was willing to step outside the Bay Area, they got an amazing deal. 

The Shopify deal memo reinforces my belief that for most online startup investors, the best deals are going to be found outside the San Francisco Bay Area (SFBA). 

There’s an incredible amount of competition for deals in the SFBA. But outside of it there’s usually not much at all. This is a big reason why I primarily invest outside of the SFBA — I’m more likely to find success. My best angel investments are from Chicago, L.A., Spain, and India. Sure I have some nice investments from the SFBA. But my largest winners are from outside California — I don’t think that’s a coincidence. 

Bessemer’s bet on Shopify will go down as one of the best tech investments of all time. There are also a ton of other valuable nuggets to be found in the full deal memo.

If you’re a new startup investor (or an old pro), I can’t emphasize enough how valuable these deal memos are. Now go read them! You’ll learn a lot.

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Greek Payments Firm Viva Wallet Is Reportedly Planning to Secure €500 Million to Support Digital Banking Business

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Greek payments firm Viva Wallet is reportedly planning to secure €500 million in capital to support its virtual banking business, according to Reuters which cited two sources familiar with the matter.

As reported, Viva Wallet officially acquired the banking license of Praxia Bank after the completion of the share purchase agreement between AMC Oak (Shareholder) and Viva Wallet Holdings (purchaser).

The Athens-based firm has appointed Jefferies to advise on the €500 million (appr. $592 million) raise which aims to offer investors stakes in a newly established legal entity that is expected to take over Viva Wallet’s existing banking loans (according to the sources).

The sources noted:

“Viva wants to be a neobank without a loan book.”

They claim that the suggested deal has been approved or given the green light by European regulatory authorities. If the deal is finalized, it would offer a new way for smaller European banks to manage their loans. This could make it easier for them to conduct business and raise funds.

Established in 2005 by company CEO Haris Karonis, Viva Wallet intends to sell loans on its books to a special purpose vehicle (SPV) within 1 business day or 24 hours from finalizing deals with them. This should remove or lower the risk from the bank’s balance sheet, the sources said.

This newly proposed structure shows how Greek financiers have reevaluated or reassessed traditional bank funding models, after the nation’s historic debt crisis. We might see more of these new financing methods, due to the COVID-19 outbreak and resulting economic challenges.

Viva Wallet provides cloud-powered payment services in 23 different European countries. It supports payments in euros, the British pound and the Romanian leu.

In January 2020, Viva revealed that it had entered a deal to acquire Greece based digital challenger Praxia Bank, which is owned by Barclays’ former CEO Bob Diamond and David Schamis, a partner at Atlas Merchant Capital.

The acquisition of Praxia Bank was approved by the Bank of Greece this month, according to the sources.

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