How do founders and early stage investors establish defendable, standards-based valuations that can be agreed upon? In This R.A.B.B.I.T. Report we explore one company that has created a potential solution to this challenge.
Company: AlgoValue (www.algovalue.com)
Sector: Data and Analytics
Location: New York/London/Tel Aviv
One of the questions regularly asked regarding crowdfunding/early stage finance is: “Who will value these early/mid-stage companies and how will they do it?” AlgoValue is an example of a solution that may answer this question. Founded by experts who provided valuation services for a Big-4 accounting firm, they deliver 3 product solutions to the market that address valuation needs for founders, investors, auditors and regulators. There are obvious regulatory, technology, “black box” and geographic risks, but the emergence of credible, standards-based, valuation tools are an important element in the creation of viable secondary markets for crowdfunded securities. More importantly, they provide a “starting point” for a valid conversation about valuation.
What problem is AlgoValue solving?
Today, company valuation and capitalization table management is complex. Frequently, valuation decisions are made on the basis of limited knowledge, by guessing or using Excel. As a result, many costly mistakes are made. In addition, the explosive growth of the global start-up ecosystem is fueling strong demand for more powerful analytical tools and accessible data for valuations of private companies or startups as well as simulations of equity financing events. Finally, the startup ecosystem often works with stale and incomplete datasets which are not shared in real time and many times gleaned from news articles and funding announcements of other companies. There is no comprehensive database to benchmark private companies. This causes major gaps between expectations and future payouts for founders and shareholders in next round financing or grants of stock options as well as in other liquidity events. These gaps in knowledge and process may cause a significant loss of time and money for both founders and investors.
Why is AlgoValue necessary?
AlgoValue believes that its solution “simplifies calculation complexities, eliminates potentially costly errors resulting from data entry from multiple sources, saves time and money, and improves the way both early stage and mature companies, and their securities, are valued.” Transparency is a key tenant of online finance/securities-based crowdfunding. These types of services may support more transparent, standards-based pricing for securities on secondary markets in addition to primary markets and tax valuations.
How does it work?
AlgoValue provides a suite of three online valuation solutions.
- Term Sheet Analyzer with “what if” scenarios and investment waterfalls
- Enterprise Valuator for comparisons with industry and sub-industry competitors and
- 409A / ASC820 Compliance tools for graphical waterfall analysis and audit-ready documentation.
These solutions include options to download templates that are work paper ready, saving hours of time for any third party reviewer or financial statement auditors. A number of their clients have used the service for “mark to market” or audit valuations and they have a 100% success rate to date in the audit process. In addition, the front end is adaptable for any terminology used in different markets which opens it up for use globally.
Who are the founders?
Raphael Meyara, Co-Founder & CEO: Before starting AlgoValue, Raphael was a valuation expert at Price Waterhouse Coopers. He spent several years advising, modeling, evaluating and valuing private and publicly listed companies, as well as their financial instruments.
Tsachi (Zach) Hageg, CPA, Co-Founder, Product Manager & CFO: Before co-founding AlgoValue, Tsachi was a manager at Price Waterhouse Coopers in the Valuation Department for more than 5 Years and led engagements of economic, financial and strategic analysis, along with consulting on transactions.
Ilan Solodki, Co-Founder & CTO: Prior to AlgoValue, Ilan worked as a developer in a start-up company managing sophisticated software projects.
What can you tell us about early traction/user experience?
AlgoValue reports “they have completed over 3,000 valuations and have a 100% success rate in passing audits with their valuations.” Over 50% of their current clients are in the United States. In addition to founders, these clients include law firms, valuation firms, CPA firms and VCs. AlgoValue has testimonials from clients that describe their solutions as “easy to use and intuitive.”
What are the risks to the company?
4 of the most apparent potential risks are:
- Regulatory risk – The appearance of new regulation in the US for stock options or other regulatory requirements that must be met for valuations to be accepted by third parties.
- Technological risk – As the market grows/matures, the company must anticipate the market’s trends and develop new versions, in line with customer demands.
- “Black box” risk: The company must ensure that its methodologies are not viewed as a “black box valuation” method which would raise concerns from all stakeholders.
- Geographic risk – While the Web makes distributed teams more viable today than ever before (full disclosure: CCA operates in a geographically distributed model) the company must ensure that its team spread across 3 continents stays aligned and productive. The other geographic risk is ensuring that while it can be a global product, that it stays focused on delivering features to key target markets.
What is CCA’s perspective?
We view the emergence of reliable, globally-available, standards-based valuation tools as game changing for the funding of early stage companies. This will change bespoke valuation processes into standards-based processes that can be delivered at much lower cost, with greater transparency and updated quickly and easily. These services align with our world view that many solutions created for debt and equity crowdfunding will also begin to be used by the rest of the private capital markets to save cost and time. Additionally, the ability to have emerging standards for valuations, combined with independent third-party research, will speed up the ability of secondary markets to form. It appears to us that AlgoValue has solid early traction with its 3 product offerings and an experienced founding team. Now they must scale their business through aggressive strategic partnership and marketing activity, while managing the risks outlined above.