Greetings and welcome to The TechCrunch Exchange, your weekly source for insights into the startup ecosystem and financial markets. This newsletter draws inspiration from the daily Extra Crunch column, but is available to all and designed for your weekend enjoyment. Subscribe here to receive it directly in your inbox each Saturday morning.

Shall we begin? Today we’ll be discussing financial matters, emerging companies, and intriguing possibilities surrounding initial public offerings.

The past week saw several newly-minted unicorn companies enter the public market, subsequently experiencing significant increases in their valuations. This trend prompted us to consider whether initial pricing accurately reflects a company’s true worth, or if there’s a disconnect between valuations in different markets.

Ultimately, it comes down to perspective, a matter of definition, and perhaps even an overreaction to current conditions. The key takeaway is that determining the actual value of any asset is inherently uncertain, a situation that is simultaneously benefiting and frustrating many investors.

https://techcrunch.com/2021/01/09/who-is-underpricing-roblox/

This isn’t a recent development. This topic has been a recurring theme for some time, but currently, it appears there are three distinct levels of company valuation, and the differences between them don’t seem to be diminishing. In fact, these gaps may be expanding.

The first level consists of private investors. These are the entities that valued Affirm at $19.93 per share during its September 2020 funding round and Roblox at $4 billion in February 2020. Currently, Affirm is trading at $116.58 per share, and Roblox is valued at $29.5 billion. A notable difference, wouldn’t you agree?

The second level represents the perspective of long-term public investors. These participants play a crucial role in setting IPO prices. They demonstrate a willingness to pay a premium for startups compared to their private market valuations. For example, while Affirm was assessed below $20 per share privately, it reached $49 per share shortly after its public debut. Another significant increase?

The third level is comprised of retail investors – individuals active on platforms like /r/WallStreetBets and fintech-focused Twitter. This group, while captivating and sometimes unpredictable, represents a segment that might not typically be considered for traditional lending. They are prepared to invest substantial sums in certain stocks, such as Tesla, often exceeding valuations assigned by more conservative investors. The demand generated by these retail investors can dramatically alter the supply and demand dynamics, leading to substantial gains for newly listed companies, as seen with Poshmark’s more than doubling of its IPO valuation on its first trading day.

The majority of investors are currently experiencing positive returns in this environment. While private investors sometimes criticize public investors for not matching the enthusiasm of retail traders, it often appears as dissatisfaction with sharing the potential profits.

Regardless, can anyone truly pinpoint the intrinsic value of a company? I recently discussed the valuation of software companies, both private and public, with an experienced founder and investor – one of many, admittedly. He explained that traditional valuation models used by banks assumed software companies’ growth would eventually decline to zero, and that profitability would be uncommon for SaaS businesses. Both of these assumptions proved incorrect, leading to increased valuations.

However, I’m still seeking a clear explanation for why companies previously valued at 10 times next year’s revenue are now, on average, achieving a multiple of 18.1x. I have a potential explanation, but it doesn’t suggest a rational or easily understandable pricing mechanism beyond current market excitement.

Milestones and megarounds

The past week saw significant progress for companies transitioning from private investment to public markets. Specifically, Affirm and Poshmark successfully completed their initial public offerings (IPOs) and began trading, and Bumble submitted its registration statement to become a publicly traded company, aiming to capitalize on favorable market conditions for IPOs.

Beyond these IPOs, another achievement stood out. M1 Finance, a financial technology company integrating various fintech services into a unified platform, surpassed $3 billion in assets under management (AUM) this week. The company had previously reached $2 billion in AUM in September, following its attainment of $1 billion in February 2020.

This growth is noteworthy because M1 Finance previously indicated to TechCrunch that its revenue is approximately 1% of its AUM. Assuming this percentage remains consistent since its October 2020 Series C funding round, the company has recently generated roughly $10 million in annual recurring revenue (ARR) in less than six months. This rapid revenue growth is particularly impressive. (Recognition to Josh for consistently highlighting opportunities in the Midwest.)

However, the M1 Finance milestone is significant for a broader reason. It highlights the surprising resilience and depth found in specific markets. The continued growth of neobanks, the substantial size of the objective and key results (OKR) software market, and M1 Finance’s ability to attract deposits despite strong competition from established players and well-funded startups are all examples of this phenomenon.

This market depth may contribute to seemingly high valuations; if the total addressable market (TAM) is difficult to accurately assess, can any price truly be considered excessive?

Here are some additional noteworthy events from the week:

• GitLab’s valuation has reached $6 billion, and the company achieved $150 million in annual recurring revenue last year, with an estimated 75% year-over-year growth rate in its latest quarter.
• LendingPoint, a fintech company, secured $125 million in funding, although the valuation was not disclosed.
• Paige, a New York City-based company, raised $100 million. It utilizes computational tools to assist in medical diagnoses.

Another Perspective on the Visa-Plaid Situation

Aziz Gilani, who leads investments as a managing director at Mercury Fund and is a proponent of the Texas tech scene (as evidenced by his Twitter profile), shared his thoughts in recent correspondence following our request for investor insights concerning the termination of the Visa-Plaid deal. The complete text can be found here.

However, we believe in sharing valuable information. And Gilani is a respected figure. Therefore, we are presenting his perspective:

These are points deserving consideration.

Odds/Ends

It’s been a busy week. Here are a few remaining items to share, including some initial funding rounds that didn't quite pan out but are still worth noting.

• Goldman Sachs has selected Marqeta to work with Marcus. For those familiar with the financial technology landscape, this partnership is significant.
• Nayya secured $11 million in funding to further develop its “insurance benefits management platform,” as reported by VentureBeat, with participation from Felicis.
• Minna obtained €15.5 million to advance its “subscription management app,” according to Tech.eu.
• Muniq successfully completed an $8.2 million Series A funding round to market a specialized beverage designed to assist with blood sugar regulation.
• Additionally, TechCrunch highlighted an interesting funding round for Crossbeam and further investment in Moss.

Hugs,

Alex