EDITORIAL

Checking In On The Great Intramural VC Unicorn Bet

tl;dr: Two rich people once bet one another on how fast one of them will get richer. Mattermark checked in on the progress of the wager.

Editor’s note: Given the sheer number of investors that Mattermark has accreted over the years, it’s impossible to avoid them popping up here and there. Before Mattermark there was Referly. Referly went through Y Combinator. Sam Altman is Y Combinator’s President. I think I’ve met him once. He seemed to be Silicon Valley Normal. This concludes today’s conflict disclosure and character profiling. 

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I recently wound up on an email chain between Sam Altman and Michael De La Maza concerning their $100,000 bet on startup valuations. As it turned out, the bet had been made nearly exactly one year before. I decided to run the numbers and see how things were progressing.

The bet had three points, all of which Altman has to win outright, or he loses. There is no two-thirds victory. Quickly, here are the terms:

  1. By January 1st, 2020, Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX must be worth at least $200 billion in aggregate. At the time of the bet they were worth $96 billion.
  2. The following companies must be worth $27 billion in aggregate by January 1st, 2020: Stripe, Zenefits, Instacart, Mixpanel, Teespring, Optimizely, Coinbase, Docker, and Weebly. At the time of the bet they were worth $9.117 billion.
  3. The companies that comprise the Winter 2015 Y Combinator cohort must be worth $3 billion by January 1st, 2020.

Whomever loses pays $100,000 to a charity that the winner selects. I presume that this is how it went down:

https://www.youtube.com/watch?v=0CPQMDS_XO0

Obviously, this is a Y Combinator-focused set of companies. But Altman has a bias towards his own shop’s work, so that fact is not surprising.

Why are we taking a look at how this particular bet is progressing? Because it’s an interesting lens we can use to understand startup valuations and investing cycles. If Altman is ahead, at least so far, the good times have continued. If Altman is behind, it could indicate the startup landscape is not behaving as one of its Resident Wunderkinds expected.

Let’s be nerds and vet the bet in tranches.

The Big 6

Mattermark dug through the news media to derive then-valuations of the 6 companies that Altman bet would double in value before the start of 2020. That initial sum totaled $96 billion. At current tip, priced valuations of the firms totals $139.33 billion. That’s a roughly 40 percent gain in a year, which puts Altman well on the way to winning this particular portion of the wager.

But to quote your favorite niece or nephew, “only sorta.”

Of the 6 firms, only three repriced during the year. That means while we can imagine and estimate what the remaining firms are worth, we lack new data to get a better handle on their value. Uber, Palantir, and Airbnb repriced during the interval. Uber provided 57 percent of the net value gain of the collection.

Looking at the data, it’s notable how even among outliers, the outlier of the outliers drives outsize returns. The rule that the few in technology generate the majority of return is a mockery of the 80:20 rule. This is the 99:1 rule.

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Keep in mind that we are not taking into account potential down rounds and currently unpriced valuation increases.

SpaceX, for example, recently launched a rocket into space and then landed its initial booster stage onto a drone barge at sea. I’m going to have to go with up round.

But when it comes to Dropbox, I would make a separate bet that it’s not worth $10 billion. The repricing of SaaS revenue is real, material, and insistent. The Box analogy isn’t a joke.

So there is slop in our accounting as private companies have long pricing cycles.

Using simple mathematics, if this cohort continues to grow at anything approaching 40 percent per year, Altman will end up with a tectonic win. I doubt that the pace will persist, but I was born frowning.

The Middle Class

The collection of companies listed above as the middle group were worth $9.117 billion when the bet was made. After a year, that figure rose to $15.516 billion. Here again we see a material increase in valuation of the companies tracked.

Up 70 percent or so, the middle firms had a blockbuster year. However, akin to our larger firms, we are parsing from a limited repricing data set. Only 4 of the 9 companies actually set a new price for themselves during the period, implying quite a lot of hidden data, not all of which will be positive.

We also have, in this case, a simply hilarious outlier and disasterpiece on our hands: Zenefits. Before this little gamble started, Zenefits was valued at $500 million. After the bet was made, it repriced at $4.5 billion. I doubt it’s worth that much now.

Screen Shot 2016-04-13 at 2.55.58 PM

To quote Rick Perry again, “oops.”

However, when calculating valuations for this piece, I only used public pricing information. If I went with my own gut instincts, we’d be in the soup. But if Zenefits is not worth $4.5 billion then the positive ∆ that Altman appears to enjoy in this category is largely ephemeral. Zenefits provided 62.5 percent of the gain in the mid-tier wager category. That’s probably nearly all gone.

I don’t really feel the need to be overly unkind, but in the current climate, it will be interesting to see if Coinbase can raise more capital at a valuation over its current $400 million. And if Teespring really is worth $611 million, if Docker is worth $1.1 billion. You could argue that those valuations were set when the sun was a bit brighter.

Write downs here via down round valuations or deletions could vex Altman’s bet, especially after you reduce the value implied valuation spike Zenefits only synthetically provides.

One Crop Of Kids

Update: Altman told Mattermark that the current value of the Y Combinator 2015 Winter batch is $439 million according to his records, but that that figure “is likely to go up substantially in the next year as more companies convert intro priced rounds.”

What is the value of Y Combinator 2015 Winter batch? I don’t know. There’s a host of companies in there. They are, in my view, too young to deal with directly. With your consent, we’ll leave them out for now.

Reprice This, You Cur

If you read all of that and are bullish on the Altman side of the bet, let’s be negative for a moment and discuss what could go wrong. After all, it’s the middle of the week, and I am sure you could use a double shot of cynicism

  • If Uber stumbles, the first bet could be in trouble. Uber’s ability to raise seemingly unlimited funds on top line growth depends on unprofitable markets shifting into the black. Burn to grow is fine when things eventually perk up on the profit side. Uber can’t lose $1 billion per year in China forever, in other words. The outlier of outliers has quite a lot of weight and expectation on its shoulders.
  • In the middle section, Stripe is currently worth around a third of its aggregate value. Square, as of market close today, is worth $5.07 billion. I have no particular insight into Stripe’s financials. Square traded for under $9 per share earlier this year, before it recovered to the $15 range. Stripe’s valuation, being a private corporation, didn’t budge. That’s the difference between dynamic and episodic pricing.
  • Some companies in combined Big 6 and Middle Class will go to zero. I don’t know who it will be, but it will happen. And others will sell for less than their current valuation. Startups are hard, and business is ruthless.
  • It isn’t clear where the market is at the moment. After a period of fear, we’re back to a feast. LP dollars are flowing into venture firms at a rapid clip, which implies that global investing activity will continue to be brisk. All that is lovely for Altman’s side of the bet. If things undergo a dramatic repricing that manages to stick, it could get messier for the bullish view.

So in total, Altman appears to be winning so far. But if the market resets to multiples closer to historical norms, investors let some unicorns die, and the NASDAQ fails to open the IPO window who knows. I’ll check back in a year.

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© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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