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‘Growth’ valuations for startups- losing its allure?


Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

 There has built during the past few years an InsurTech chase to ‘unicorn’ status  not uniformly based on NPV, but on growth. Fellow Daily Fintech columnist, Ilias Louis Hatzis, wrote well this week on “Tokenized Venture Capital” and VCs’ chase for investment valuation lightning in a bottle.  However, in that pursuit and as the growth value method broadens in use adverse indicators may be upon us.

There is one primary measure of success within the InsurTech startup ranks- reaching unicorn status.  Sure, innovation, disruption, and collaboration have been noted as InsurTech’s raison d’etre, but getting funded at a level that allows a unicorn ‘valuation’ of more than USD 1 billion based on potential, or growth- there’s the success differentiator.  Unicorn status currently opens doors- funding, IPO consideration (or ICO, or IEO, per Mr. Hatzis), key to the unicorn’s executive suite WC, and so on.

I have held that growth valuation is an arbitrary and incomparable standard between organizations and speaks little to the fundamental financial position of a respective company. A billion-dollar valuation founded on a $209 million funding level to date (Hippo Insurance) cannot be verified next year based on operations (not that The Hippo is less deserving of the designation than others- Hippo is to date an effective insurance entrant).  Lemonade enjoys an estimated two-billion-dollar valuation based on $480 million funding to date, another valuation that would be impossible to empirically peg this time next quarter (and Lemonade certainly is operating as an insurer on the move and experiencing increased value), and per SoftBank investor/Lemonade board member, Shu Nyatta,  “we’re confident that the best is yet to come. The value Lemonade provides, together with the values baked into its model, are fast making it one of the most intriguing, differentiated and compelling brands.”  Growth as value.

Where the arbitrary values become problems to the market is when those values are trumpeted and leveraged by funding companies to build finances to invest in further startups, or to support IPOs or other exit strategies.  The estimable Wolf Richter expounded on the inherent dangers of spurious valuations in his podcast 10/06/2019,  THE WOLF STREET REPORT, and transcribed here.  I’ll not paraphrase Mr. Richter’s explanations and arguments but the podcast’s message is quite clear- wholesale leveraging of investments in startups in the eternal chase for winners is fraught if unbridled, as SoftBank is finding out.  The cascading effects on the market when big players grab- loss of VC confidence, increased tightening of requirements for those looking for funding, certainly financial losses for VC investors, and ripples into neighboring industries.  And then there is a resulting big gorillas in the startup room that spook others- the WeWorks (valuation arbitrarily dropping from $50 Bn to $25 Bn), and Ubers – IPO at issue $45, now at $29 per share.  Both firms being substantial positions for SoftBank, and significant causes for the heavy debt burden the firm has.  Combine the chase for successful IPOs, significant unicorn status, the firm’s asset sheet that includes more than 1/3 of its value as intangibles, the need to leverage valuation to keep the debt churning, and untenable bubble status comes to mind. That is no help to the VC community.

Take an example of an InsurTech that successfully posted an IPO, Germany-based insurer, DFV_AG,  Deutsche Familien Versicherung AG.  The firm’s IPO generated approximately 75 million euro, the funds and all financial operations can be reviewed in quarterly statements, and the market can apply financial accounting valuation methods if so interested (of course there are many so interested as there is a traded share price).  Capitalization and value are simply a matter of math and allows comparison with peer companies.  DFV_AG can take a valuation to the bank- literally.

Another option for startup funding- home grown initiatives.  Consider yesterday’s announcement by Santander Bank in Chile of its InsurTech spinoff, Klare.  The firm identified customer needs and a potential competitive advantage, worked the plan and numbers, received regulatory approval and are creating the start of a fintech ecosystem through organic growth.  I haven’t looked but it’s certain that the bank’s financials and capitalized valuation are available for review.  Certainly there are some internal sponsors of the action that have some growth valuations in mind, but those they keep to themselves for discussion over a  Nescafé.

And my final comparative, OYO, a startup in India that has built a multi-billion dollar valued firm operating in 80 countries, overseeing operations in 1.2 million lodging rooms.  Generating revenues before, during, and residually after consulting with lodging owners, and benefiting from investment by its founder, Ritesh Agarwal to the tune of some billions.  Yes, SoftBank is an investing parent but in this instance the founder has big ‘skin in the game.’  Again, there are financials that investors and the accounting regulators can see and apply valuation techniques to.  One expects OYO will grow, but that will be only a collateral basis for valuation.

Seems time to value ‘value’ as value in the economics sense, not the emotional.

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