In this episode, Dan and Daniel discuss the recent parameters update for the Equidem platform, focusing on the implications of current market trends, multiples analysis, and the impact of interest rates on startup valuations. They explore the methodologies used for valuation, the variability in global startup landscapes, and the importance of long-term projections in a changing economic environment. The conversation emphasizes the need for a reset in expectations and highlights the opportunities that arise from economic variability.
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Takeaways
The recent parameters update reflects current market conditions.
Multiples have contracted significantly, indicating a market correction.
Valuations should be based on long-term trends rather than short-term fluctuations.
Interest rates play a crucial role in determining startup valuations.
The startup landscape is influenced by global economic factors and variability.
Discount rates are essential for projecting future valuations.
A reset in expectations is necessary for a healthier startup market.
Opportunities often arise during economic downturns.
Starting a startup in a recession can lead to better growth potential.
The conversation encourages a focus on fundamentals in valuation.
Chapters
00:00 Introduction to the Parameters Update
03:10 Market Trends and Multiples Analysis
05:57 Valuation Methodologies and Startup Metrics
09:12 Impact of Interest Rates on Valuations
11:58 Global Startup Landscape and Variability
15:02 Discount Rates and Future Projections
17:51 Resetting Expectations in Startup Valuations
20:45 Opportunities in Economic Variability
24:00 Conclusion and Future Outlook
Transcript
Dan Gray (00:01)
Welcome to a special episode of the Equidam podcast were having a quick look at the parameters up date five point six which has come out in february twenty third, and should be launching today if you’re listening as this podcast comes out. It’s the annual or by annual update of the Equidam platform three different sets of parameters which kind of keep us current with the market nd as always we have Equidam and founder Daniel Faloppa here to shed some light on all of this. how are you Daniel?
Daniel Faloppa (00:35)
Yeah good good exciting to talk about it especially for like the implications that the economy has on the parameters this time and like what does it mean for startups going forward so yeah quite excited to get into this
Dan Gray (00:45)
yeah perfectly too and it’s it’s an interesting one you know obviously as a lot of people might expect it’s a bit of a sea of red for the multiples a lot of downward trend but it’s not all bad news right
Daniel Faloppa (01:06)
yeah yeah starting from the multiples right we see yeah contraction that everybody signed a stock market already a few months ago so i wanted to to preface the whole discussion with our philosophy on our parameters right so we we tried to be we tried to be not as reactive to the market as well news and and and and almost everybody is
um because we do believe that well first that that’s important to avoid hype and to avoid the opposite of hype like troughs in the in the in the date and in the economy and also because start up themselves which is what we chiefly value are first they are supposed to be counter cyclical but anyways they are not as connected with the global economy as you generally read on TechCrunch on every
sort of news outlet that tries to
to push news around to people right so so that’s why we up date our parameters twice a year we reason on them we try to to make sure that they reflect market conditions not only for that week for that month but throughout throughout a more important period of time and uh yeah so on the multiple what we are incorporating now is basically the
adjustment of the stock market on on tack but mostly on on any industry to everything that has happened right so we had multiples going very very high during covid we said this a hundred times but thanks to the vast government aids and the vast amount of money that was going around in the market that pushed prices of everything up when price of stocks go up
expected revenue expected profits remain the same the multiples go up right and we saw that especially in tact especially in finteck like even even if we want to reduce that lance even more we saw very very high multiples and we didn’t adopt a lot of them we didn’t actually adopt the peak multiples that happened during that during the time because we wanted to to value this stability in our in our data in our evaluations
Dan Gray (03:16)
Daniel Faloppa (03:40)
but then we finally incorporate this new level we see that it’s going to stay the same or it’s going to stay more or less like this for the for the foreseeable future and so it’s it’s time to incorporate so i think we the main conclusion on that is we we we got back to the levels of twenty nineteen right like we got back to what a lot of people are calling reasonable multiples of course it’s easy to call them reasonable aft
Dan Gray (04:03)
Daniel Faloppa (04:10)
the fact right but but yeah so interesting interesting to see and yeah hopefully they apply for for the foreseeable future right now
Dan Gray (04:11)
yeah absolutely i think it was particularly interesting to me to notice that the know when we did the paramesis up which one would be that in november twenty twenty one i think we made a note of a couple of industries i think it was relating to airlines footware outdoor recreation all that kind of stuff and they had seen a big increase because of covid and you know there’s analysis in the article there about about about why but some pretty obvious reasons
Daniel Faloppa (04:49)
Dan Gray (04:54)
and those are the industries that have had the biggest dips now so it definitely feels like a correction and yea the broad trend seems similar to going back to kind of twenty nineteen sh
Daniel Faloppa (05:00)
yeah and that’s also something that we that we reason about the opposite or sort of for airlines for example they had such a declining profit during cove time because obviously nobody could fly um investors knew that this would would be a temporary thing so their stock price didn’t go down as much right so then in that case we kept a similar stock price with very much decreased revenues and profits and which made the mark the multiple sky rock
Dan Gray (05:34)
m hm
Daniel Faloppa (05:34)
for no reason
and and for no actual true reason let’s say so if you apply that multiple to the valuation of something else you are misinterpreting it unless it’s another airline that had exactly the same contraction in in in flights and a yeah so that’s that’s that’s what happened in that case
Dan Gray (05:57)
yeah if you apply that multiple even to the same airline today it’s going to produce a ridiculous result
Daniel Faloppa (06:02)
yeah exactly yeah things have changed a lot
Dan Gray (06:06)
so one interesting thing that i found is you know that obviously the multiples that they’re based on public market research they reflect the public markets the other component we look at is the average maximum start up valuation data which informs the score card method and the check less method for more details and that you can go read our methodology document a very interesting read but yeah the trend there was was cute
ously different you know mostly still going up and you know to look at the u s particular you know going back through some of our previous promises up dates the us has basically had three years at least for this measure of average and maximum for seed rounds roughly like twenty to twenty five per cent growth it’s been pretty stray steady which i found curious as a comparison to what’s going on with mltwiththeir multiples
Daniel Faloppa (07:03)
yeah yeah so
yeah following in that philosophy of consistency right when we take average and max valuations we look at the data for the previous four years right what you had so if we had like shorter time frame of data like you know if we were averaging valuations of twenty twenty one versus valuations of twenty twenty two for this up date like we would probably see a slight decline questionable slight decline because in
valuations haven’t changed that much it looks more like the quantity of startups funded is actually different and maybe the amounts but m but that’s but that’s exactly like what i think we believe in is take a longer horizon on this and try to get out of this hype trends right so i think we stayed on the conservative side when valuations really got hype during covid um on the the qualitative methods
Dan Gray (07:52)
Daniel Faloppa (08:12)
and and then what happens now is that we are still incorporating a bit of that and we’re also not reacting too much to like the latest the latest let’s say two months or three months that has been really the more crunch part for startups why do we do this we do this because the same way that the past three months have happened the opposite could happened the next three months right the actual
month to month variation of start up valuations based on this incredible types is is quite high like if you look at acrypto for example obviously crypts extremely volatile but the whole the whole environment has radically different valuation from from three months ago and that was radically different valuation from the three months before that should we you know be extremely reactive or more conservative or our biases toward
uh towards being conservative and trying to go back to the fundamentals of these values
Dan Gray (09:19)
yeah and i think that’s a very important point and i’m not sure if this will put it exactly the right way so correct me if i’m off a bit but basically
you know you might be doing evaluation today but you’re not actually working out the value of the company today you’re working out the value of the company at some like projected future point in time you know four years from now whatever it may be so therefore like what the average max today is doesn’t really matter as much as what the trend is so which we’re trying to get a better view on what the trend in that changes over a longer period of time
Daniel Faloppa (09:51)
yeah and and and then you’re using that future valuation to then calculate the one today exactly so so it’s it’s using the available data which is reflective of the past to actually project something in the future and then discounted back on the past so if we use data that is temporary if we use data that is not long lasting quote unquote we we get the worst valuation and week
Dan Gray (10:03)
Daniel Faloppa (10:26)
hype a lot more hype cycles and when when we forget about that right it was on the news today no i wasn’t twitter like the one the one that you sent me about the strategy of a sixteen right of using this amount of liquidity and this lower returns and and be able to deploy a massive amount of capital with lower returns because anyways there were no returns anywhere else right so
Dan Gray (10:27)
Daniel Faloppa (10:56)
those valuations were like rooted in the present let’s say and and maybe didn’t think too much about the future even though like this future that we’re in now was very very hard to foresee when when these things came out otherwise obviously nobody would have invested in this strategy right so
Dan Gray (11:18)
Daniel Faloppa (11:21)
so i think you know it was it was an interesting bad for them and that was my point of disagreement for for this was like they were just doing basically interest rate rbitrage and return arbitragonon large numbers which which is definitely possible and useful to do but would they have invested at those valuations if they did this process of like you know not just applying the present but applying a longer trend
to the future state of the company and then discounting it back question you know
Dan Gray (11:58)
yeah very good question and in line with the comments earlier about correction you know we see a similar theme even with the average max in that the two countries that that really had a bit of a dip which i believe yeah finland and chilly they are both countries who shut up last year for various reasons you know they had a more rapid recovery from covid or whatever it might be but last
Daniel Faloppa (12:22)
Dan Gray (12:27)
yea they were outliers going up so this year the outlies going down but the overall net is there you know more or less in line with with elsewhere that’s similar
Daniel Faloppa (12:38)
yeah yeah there is also always to consider the data variability right so we are looking at start up valuations in specific countries even if we take a time period of four years for countries that have little start up activity or like let’s say less start up activity a huge successful company with a massive round at a massive valuation could screw the data even though we we try always to
Dan Gray (12:44)
Daniel Faloppa (13:09)
restrict like our analysis to early stage to you know but so a bit of variability could be on that side as well so maybe i really had some you know incredible company like quote quote almost almost outlier company before and now it didn’t have any more that could also happen
Dan Gray (13:25)
yeah and each of these you know even if you you look at you know an industry in the pramprmates up date how it’s changed and maybe your like looking at your own company in the same industry and your thinking about like the kind of direct impact on you it’s you have to keep in mind that each of these is just one perspective on valuation and you know the kind of final solution is a combination of multiple so none of these changes are going to have like a direct a hundred percent impact
Daniel Faloppa (13:53)
exactly but but they all do they all do impact right so that’s that’s i think why well it’s very interesting because even even that outlier company that raised you know let’s say let’s say that there was an outlier company that raised an incredible high amount at a very high valuation in any country is going to raise the profile of the country is going to have a small impact on valuation of all the other startups right so yeah
Dan Gray (14:06)
Daniel Faloppa (14:31)
i think that’s that’s super interesting how how these things all come together and how much they re weighted is is super important to the final outcome
Dan Gray (14:42)
yeah indeed and you know the final piece of the puzzle i guess is the way we calculate the discount rates and that i’m less familiar with so maybe like
Daniel Faloppa (14:56)
Dan Gray (14:56)
explain
a little bit about like how that’s used where it comes into the equation and what the broad changes
Daniel Faloppa (15:02)
yeah so so the last picture
well i mean it’s another complementary piece of the puzzle right is the what’s happening with interest rates equity risk premiums and like the discount rate of of any investment but also of startups right so because of the inflation that is happening pretty much in all all over the world we’re seeing now a tightening of monetary policy
Dan Gray (15:11)
Daniel Faloppa (15:37)
physical policy hopefully as well in in in an effort to reduce this inflation to quote on quote cool down the economy um what does this mean is that well the way that this is accomplished is by increasing interest rates on government debt and and that reflects thanks to arbitrage on every other interest rate right in common words what this means is that an investor could make
zero percent or or zero point one percent on a very safe investment two years ago now they can make two three four percent on that investment right so when they go and they invest on a risk ear investment like a start up they’re going to demand a higher return there as well right the return is the same thing of of a discount rate right if the company cet stays at a hundred million and we want to achieve a higher return we need to have a lower a better d
right now a lower valuation of the company right so this increase interest rate reflects one to one in lower company valuations again we are using a long term like short term data for a long term view right like the company is going to acid ten years from now what’s going to happen to interest rates in ten years from now right so or like throughout this period so we should always try to make an educate
Dan Gray (16:54)
Daniel Faloppa (17:07)
it gas and and and not take for example short term interest rates but use like the longest interest rates to to discount this type of long investments and and the same is like i mean a reflection of the same phenomenon than in is on equity risk premiums less consistent across countries but yeah just equites premiums went up as well the two of them together compose the discounted this
count factor for for t c f for discounted cash flow models and and so that is going to reflect in the lower valuation buy and large on startups from those methods
Dan Gray (17:51)
i think the combination of all of these you know to take a rough guess how it’s going to affect like average founders coming coming to the platform you know obviously there’s some up the sum down overall it’s probably a slight down for some who were may have previously had evaluation you know pa type for a fintec company or something it’s going to be quite a large down but clearly quite a rational one you know in line
the market
Daniel Faloppa (18:22)
yeah yeah exactly so so that’s that’s what we try to do right ry to try to make sure that valuation is not a deal breaker but getting by getting defaults that are you know as realistic and up dated as possible with these philosophy of they need to be long term valid they need not to be a temporary temporary hype the other factor that is definitely and that has already been incorporated likely by all the founders
using equidem is different future perspectives of the company right when when capital was cheaper faster to raise they could push that that accelerator maybe further right and and right now just because of this general lower optimism on the future they are probably already they already thought about taking the food of the gas a little bit right that affects projections and then in turn in turn
that affects valuation so um yeah i think most of the change was already incorporated but then this one gets gets everybody hopefully closer to the market
Dan Gray (19:33)
m i think that looking at the last few paramiseupdates as well i don’t know about you but you know as you mentioned we’ve we’ve stayed up dated we haven’t always kind of adopted the kind of peak hype multiples etcetera so we’ve kind of balanced it a little bit but i think for me this is the first time at least in the last couple of years where there’s a paramisesupdate that really feels like
it’s a pretty thorough sensible reset you know and i feel very happy comfortable with it whereas in previous years there’s been quite recognizable ups and downs that were going to cause problems
Daniel Faloppa (20:08)
yeah yeah so yeah i mean that’s that’s the case for everybody i think nobody has ever seen in the past twenty years a reset of this magnitude maybe during the financial crisis but that didn’t affect start up that much so we’ll see how this one will because so far also hasn’t affected start up that much i think for us like
in retrospect obviously but also during that period i felt like i felt like things were going too far things were going too far in the sense that to justify those valuations almost every company had to take over the sector that they were operating in and that sector would have had to expand ten x anyways in order to know in order to justify that valuation so that’s where
um we kind of lost track of the fundamentals like the market los track of the fundamentals and and it went a little overboard that’s why right now with this correction i don’t think we feel that its bias towards investors like it still it just got back towards a quota quote more fair deal what does that mean right
that means that in a fair deal everybody should make you know enough to be satisfied right with their with their returns if we manage to achieve that in the whole market we have hopefully a healthier market that rewards also investors right not only not only investors not only founders but both are rewarded and you know founders can be incentivviced to continue growing the company or to start another one and you know be successful on that one investors can make their right
returns to to expand the pie on that side and also to invest in further startups afterwards right so that’s what i would consider fair valuations and a healthy start up market
Dan Gray (22:27)
yeah absolutely i guess you can kind of in a very very rough way you can bench mark that a little bit by saying you know a start up should raise you know in the past eighteen months of runaway may be now twenty four to make life a bit easier or something and you know at that particular stage in return for that you’re giving up something like fifteen to twenty percent of equity and if the mast of that works out then the market is pretty healthy and if it doesn’t work one way or the other then there’s
Daniel Faloppa (22:54)
yeah indeed
Dan Gray (22:57)
problem you know for all that that’s a very crude way to look at it
Daniel Faloppa (22:58)
yeah i think i think to be honest
i don’t even think that twenty four are required i think we went back to a team from the six months that we were hearing because we we actually had workshops were started up set like no our like we’re raising for six months because everybody is raising every six months and then we we were pushing back now we were pushing back like well maybe maybe think about it right and and and now it looks like you know i don’t think
Dan Gray (23:15)
Daniel Faloppa (23:29)
like well you know time will tell but i don’t think startups should prepare for for twenty four months or like race with those type of runaways but then getting back to a healthy you know twelve to eighteen from the six that was before yeah it’s probably good thing for everybody yeah
Dan Gray (23:48)
it will be interesting
maybe in a couple of months now as we approach like the anniversary of this little start up fund raising crisis happening going back to those letters from why combinator a sixteen you know they were the advice they were giving startups you know i think i think it was a sixteen z that said maybe even raised like thirty six months of runway or something but seeing like seeing how that looks in hindsight and maybe it won’t have been so bad and it
Daniel Faloppa (24:00)
okay yeah
Dan Gray (24:18)
ertainly doesn’t seem to be so bad so far but then you’re always looking into the future
Daniel Faloppa (24:25)
yeah i was i was i was actually looking into it just now into not into the future but into the whole question of of what’s what’s going to happen and yeah it’s very open like the the consent just seems to be on a longer deeper recession than than the ones that we’ve seen in the past because it is now accompanied by inflation and then
physical and monetary policies cannot be used or they cannot be used to the same extent to to combat this this this crisis or like the like upcoming alleged crisis because at the same time um well inflation itself is more or less an indicator of of a healthy economy right of high employment rates of um you know investments happening an
i think so m yeah it’s it’s it’s it’s a question it’s a question what’s what’s what this is going to mean
i mean for sure it means that we are not in the in the six months fund raising camp that that it was before but but you know i was i was reading about this idea that a lot of the last crisis that we’ve experienced lasted a matter of months because they were promptly solved or aided by government spending and central bank spending include
Dan Gray (25:46)
Daniel Faloppa (26:08)
in the two thousand and eight crisis and that was possible because it wouldn’t reflect on inflation now that’s not possible any more so what’s that going to create it could potentially create also multirumultir crisis but what’s the likelihood of that so yeah definitely something to to look out for and to and to try to see how it develops almost maltby
Dan Gray (26:39)
yeah i had a fascinating back and forth with brian nichols hustle fund on twitter and he was you know we both had slightly different perspectives but his was you know entirely valid and very interesting talking about the the influence of obviously interest rates on start up fund raising and how that affects the suppliant demand of capital that goes into startups and also the other side of the equation which is the
the competition for deals you know the volume of good startups appearing and that also is kind of affected a little bit by the economy the way you get after a recession of startups that appear because of people losing jobs being affected by lay offs or whatever who then start their own company or you know maybe in in super happy buoyant zero interest rate times you get like a lot of web three startups which go nowhere so that’s not a good environment but yeah it’s really nice
Daniel Faloppa (27:25)
Dan Gray (27:39)
see all this stuff talked about in ways which i don’t think it has been so much in the past
Daniel Faloppa (27:44)
yeah yeah yeah i know that’s that’s that’s interesting and like my you know my strong belief is always when there are this type of where there is variance in finance in general where there is variance there’s opportunity right and and so when there are when all these changes are happening opportunities happening as well so the correlation of waves of very valuable startups coming out of crisis or recessions
yeah it is because of the lay offs and like people starting new companies but also because those opportunities are are presenting themselves right thanks to the variability and m and also to be honest like if you start at the bottom right it’s you can write the trend right so starting a start up at the top of the economy like in twenty twenty one or so
Dan Gray (28:25)
Daniel Faloppa (28:44)
definitely doesn’t make it easier to then improve from there right whereas when you start from the bottom like counter intuitively it’s as much easier to go up and be dragged by everything else when everything else restart yeah
Dan Gray (28:48)
well i think that is a perfect optimistic note to end on anything else we haven’t covered you like to mention before we close up
Daniel Faloppa (29:12)
no i think i think that’s it yeah
Dan Gray (29:14)
perfect well yeah as as i mentioned there will be an article in the website as well which goes into the paramaters update in a little more detail you can also always reach out to us by email linked in twitter however you want we always like to talk about this stuff and if you have any questions we will do our best try and answer them
Daniel Faloppa (29:35)
yeah absolutely and also yeah definitely happy to have feet back on all we do right so on on the parameters themselves interesting but also on our philosophy behind it and i’m really happy we got to we got to share this hopefully is interesting for for everybody that is listening and yeah looking forward to speak
Dan Gray (29:58)
nice yeah until until next time it’s been good and great
Daniel Faloppa (30:07)
till next time