Raising money for the sake of raising money
What is a startup CEO’s primary job? It’s to keep the company financed. Usually that means raising money, and a great CEO will be able to effectively manage his company’s capitalization.
But that doesn’t mean that some CEOs don’t get carried away.
Some CEOs in Silicon Valley get completely carried away, and they raise money because... well, that’s a good question.
The news that Eventbrite just raised $60 million -- on a reported $650 million valuation -- would appear to be a classic example of this. Here are a few things to keep in mind about Eventbrite:
- They will generate about $50 million in revenue this year, up from about $30 million last year. This assumes that they keep about 5 percent of gross ticket sales ($1 billion and $600 million in 2013 and 2012 respectively).
- Their valuation is somewhere between 12 times and 14 times current year revenue -- this is a massive trading multiple in any industry at any stage. Even if it were applied to a hyper-growth company, it would be a high valuation.
- They only grew revenue by 60 percent last year. That is not hyper-growth. That is not even close to hyper-growth. That is slower growth than Yelp, which is already public, and trades at a much lower revenue multiple. It is slower growth than Marin Software, which is growing faster, in a bigger category, and is worth far less on the public markets.
- The company is already worth about as much as TicketMaster -- when you consider that TicketMaster was itself acquired by LiveNation, which is (combined) barely a $2 billion company. So it’s unclear how much larger they get from here. Nor is it clear how big this prize can get, even if they do supplant TicketMaster (which they won’t).
- They have already expanded internationally -- so that chip is played.
- With over 210 employees, they are probably not very profitable. They were not profitable as recently as nine months ago, according to their CEO.
And if that was not enough, here are a few more fun facts about Eventbrite:
- Last year, they had almost $60 million in the bank, and their CEO predicted that they would not raise more money before IPO’ing.
- They have now raised an eye-popping $135 million to date.
- The company is in something of an “IPO Trap,” whereby they know that the public markets will not validate their over-valuation, and so they go to private markets (who are surprisingly willing).
Will Eventbrite be able to go public in the next 18 months and earn the sort of $1 billion valuation necessary to justify the risk that T. Rowe Price and Tiger Global are taking?
I don’t think so.
And, here is the craziest part of all...
I like Eventbrite. I think it’s a great company with a useful product. There is nothing wrong with this terrific business, except that they have raised way too much money at valuations that do not make any sense. Their Ishtar-like catastrophe of a capitalization strategy is literally the only thing wrong with the company.
And so this brings me back to my initial point...
Some CEOs are just too good at fundraising for their own good. And this is a textbook example.
The company has raised too much money, which is forcing massive valuations that public markets would not validate today and that they will not validate a year from now or two years from now.
They have diluted to high heavens, and these 210 employees will probably see very little money even if they do IPO. In comparison, Yelp had raised about one-third as much money at the time of their IPO, and their employees didn’t make that much money. [Disclosure: my little brother was a Yelp shareholder who participated in that IPO].
Kevin Hartz has a lot to be proud of with Eventbrite, but I have no idea what he is doing from a capitalization standpoint. Even a cursory analysis of their (carefully shrouded) financial picture demonstrates that there is no way they can justify their valuation.
The fundamentals don’t add up.
Close your eyes and think of Amazon…
And it comes on the heels of another turbo-fundraiser — Foursquare — which has raised a preposterous $110 million, despite the fact that it has not even achieved eight-figure revenue (according to whisper numbers).
Much like Kevin Hartz, there is a lot to like about Dennis Crowley. He built a product that he believed in, drove insane press attention to it, turned New York into a respected startup locale, and got a cool spokesman deal with Best Buy.
But his company fundamentally makes zero sense in the context of its capitalization. None. Zero. Even the most fanciful of Wall Street analysts would look at Foursquare’s balance sheet and P&L with their mouth agape and wonder “how did it get to this point?”
Close your eyes and think of Amazon...
So, I will end this article by once again returning to my initial question... Why are these CEOs raising all this money?
Because they can. And that is the worst reason to raise capital.
[Illustration by Hallie Bateman]