I listened to this podcast yesterday with Henry Ward, Founder & CEO of Carta. Henry is one of the more captivating founders I have heard speak in the last year. I believe in his vision and would bet on his leadership. Henry is an out-of-the-box thinker and contrarian who questions the defaults of the status quo. I like a lot of his ideas.

One of Henry's ideas is related to severance. Most companies have severance packages for terminated employees, but as Henry points out, it does not make any sense that employees who decide to leave by their own choice receive no such compensation packages. Henry asks why someone who serves a company well for 5 years and decides it is time to move on should receive less when leaving than someone who did a bad job for that company for 2 years and had to be fired as a result of their poor performance. It does not make much of any sense. That is why Carta initiated a sensible practice called "equal departure" in which employees receives comparable departure packages regardless of whether they are being fired or leaving by their own accord. Maybe one day some company will try a system where good performers who decide to leave will actually receive proportionally more in departure compensation than poor performers who are fired. For now, Carta's "equal departure" practice seems like a step in the right direction.

While on the subject of Carta, I figured I would share an argument for why I believe the company is undervalued. I wrote this essay months ago as part of an application to an awesome VC firm that decided not to hire me. If you are not interested in valuation, you can probably stop reading here and move on with your day.

Present an argument for why one of the following is either overvalued or undervalued - Facebook, Uber, Bitcoin, or Carta. [750 Words Max]

I believe Carta is undervalued. If I could invest, I would. Thanks to Carta, I may soon be able to.

Carta’s latest valuation of $1.7 billion is based on the $300 million it raised to fund the enablement of liquidity across its network of private companies and their shareholders. I believe that Carta’s network effects have positioned it to become the leading cloud-based marketplace for private assets, and that opportunity represents an enormous value.

In estimating Carta’s value, it would be impractical to use intrinsic valuation methods such as DCF or LBO analyses because the company is still very much in its infancy. Methods using public comparables and precedent transactions, however, can be useful for the purpose of estimating a range of multiples at which the market might value Carta in the near-term.

Still, there exists only a limited universe of loosely relevant public comparables and precedent transactions because Carta’s “Act 3” is such a unique proposition and the company’s growth rate has been extraordinarily high over the last few years (>100%). For example, despite their similarities to Carta’s initial offerings, it would be inaccurate to use precedent transactions like the sales of Solium Capital to Morgan Stanley or Equatex to Computershare at 7.0x and 5.4x revenues, respectively. These companies were not growing at nearly the same rate as Carta nor would they properly capture the upside of Carta’s forward business model.

A more useful set of comparables includes a selection of high growth SaaS businesses (>30%) for both precedent transactions and public comparables where the median revenue multiples are 20.0x and 14.1x, respectively (see “Appendix” for companies included). Still, the median growth rate for those “high growth” public comparables is only 42.8% which pales in comparison to Carta’s triple-digit rate.

In order to best account for Carta’s growth rate, I built a regression analysis using the revenue growth rates of the same set of public comparables. This analysis implied a 38.1x revenue multiple for Carta assuming an 80% growth rate which is conservative versus historicals. The implied multiple suggests that Carta is undervalued by nearly 25% based on its latest valuation (30.9x its revenue run rate of $55 million at the time of the raise).

Additionally, the 14.1x median multiple of the public comparables serves as a solid estimate for what Carta would trade at in a downside case if its growth were to slow in the near-term. For example, if Carta’s run rate only grew by 70% in the year following its latest valuation and 40% the year thereafter, a 14.1x multiple could be reasonable.  Applied to what would then be a run rate of $131 million, that would imply a valuation of $1.85 billion which even in the downside case by this logic is still a bit greater than its current valuation.

Beyond the multiples math, my belief that Carta is undervalued also relies on my conviction in the market opportunity that Carta is after, the advantage it has earned towards capitalizing on that opportunity, and the ability of its leadership team to drive execution.

I believe the development of Carta’s market opportunity is likely inevitable due to the growing issue of extreme and accelerating wealth inequality which, by definition, the vast majority of people will want to reverse. Carta will help to accomplish this by encouraging employee ownership, empowering all shareholders with liquidity, and enabling more people to benefit from the significant value creation that occurs before companies go public.  

In terms of Carta’s advantage, I am impressed by how rapidly its network effects have established critical mass. Carta already has over 13,000 companies and 800,000 shareholders using products related to equity management that are firmly and comfortably embedded into their systems. I believe Carta’s significant lead over any pending competition will only continue to grow in the near-term as a result.

Finally, I like what I have heard and read from Founder & CEO Henry Ward. I admire his vision for Carta and believe he has done a tremendous job thus far in leading the execution of his vision. Recruitment guru Lou Adler famously said, “past behavior is the best indicator of future performance”. If what Henry and the team have done to date is any indication, Carta’s future looks extremely bright.

Appendix:

Public Comparables include Shopify, Atlassian, 2U, Smartsheet, Dropbox, Ring Central, Proofpoint, Twilio, Zendesk, ServiceNow, Everbridge, Mimecast, and New Relic

Precedent Transactions include Qualtrics / SAP, Marketo / Adobe, Adaptive Insights / Workday, Github / Microsoft, and Mulesoft / Salesforce