UK and US June User Group Blog
Many thanks to those who attended this month's user group. As normal it was a fast paced session covering quite a wide range of related topics, seeing you all ask a number of questions which was great!
The sessions started off addressing the differences between book value of equity and the market value. The book value is simply total assets less total liabilities. This is termed net assets or shareholder funds (along with perhaps a myriad of other terms!). Whilst the book value of equity is used in some circumstances such as covenant testing etc, it is not really an appropriate way to value a business (unless real estate).
An example was given on Tesco and how its market value is over twice the value of its net assets. For many businesses they are worth more than the value of their net assets - taking Coca Cola as an example given the large amount of intangible assets they have.
Functions on code such as smart valuation accompanied by the predictor can support Code-FI users in estimating a market value of a business which is much better aligned to establish the wealth and giving capacity of prospects than net assets. For completeness real estate business (i.e. developers and owners of large amounts of real estate) should be valued on the net asset value of the business. We will look into this future in a future user group session as there are some complexities!
The session then addressed the different type of voting vs non voting shares along with alphabet shares (ie A, B C etc classes and implication for voting and dividends).
Jon then discussed acquiring and how some small technology / AI / software development companies are getting bought out by some of the bigger tech companies on the basis of a value per senior developer. In some cases this can be in excess of £1m per developer. Often these companies are being bought to gain access to the developers rather than the underlying prospect they have been developing.
During the session several questions were asked with a brief summary of Jon's responses below.
Q: When is the best stage to approach companies for a donation / pre-exit philanthropy?
A: Before series A is the best point. Series B and C is too late.
Q:How do I identify these smaller tech companies on Code?
A: Company search function on Orbit / select the relevant sector and sub sector, add in any financial search filters (such as turnover under 10m), filter those companies established in the last 5 years.
Q: What are the characteristics of tech companies we should be looking for?
A; Small, growing companies that have potential. Review alumni / network / contacts for anyone in this sector. Establishing what they do, their revenue and their likely success is very hard so play the numbers game and get fundraisers involved to build long term relationships with them.
Thanks to all those who attended and we look forward to seeing you at the next one!
