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Money How to make sense of Canva's $1 billion valuation

02:21  14 january  2018
02:21  14 january  2018 Source:   smh.com.au

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Both in the ancient literature sense - and in the billion-dollar start-up sense . Canva , a white-hot, Surry Hills-based design software start-up became the world' s latest "unicorn" this week - a private company valued at more They were sold, or had to raise money, at valuations below the $US 1 billion mark.

Unicorns are mythical creatures.Both in the ancient literature sense - and in the billion -dollar start-up sense . Canva , a white-hot, Surry Hills-based design

Unicorns are mythical creatures. Both in the ancient literature sense - and in the billion-dollar start-up sense.

Canva, a white-hot, Surry Hills-based design software start-up became the world's latest "unicorn" this week - a private company valued at more $US1 billion.

It marks a significant milestone for the fast-growing company, and is another sign of the momentum in Australia's maturing tech industry.

Still, there are reasons not to get too carried away by the news.

For one thing, "unicorns" used to be rare, hence the moniker. That is no longer really the case.

According to CB Insights, a start-up research firm, there are now 224 of them around the world (some of the better-known ones include Uber, Airbnb and Spotify).

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Canva ' s ascension to 'unicorn' status is shining a light on the murky, misunderstood world of start-up funding.

Last week, Uber confirmed that it had raised $ 1 .2 billion at a billion valuation . Shortly thereafter, a debate began over whether or not Uber could possibly be worth the price tag. In most cases, such a logical argument would make sense .

Canva, co-founders (l-r) Cameron Adams, Melanie Perkins and Cliff Obrecht. The company could have raised funds at a higher valuation, Obrecht says.© Provided by Sydney Morning Herald Canva, co-founders (l-r) Cameron Adams, Melanie Perkins and Cliff Obrecht. The company could have raised funds at a higher valuation, Obrecht says. Canva is the only Australian firm currently on the list - and the first to make it on there since Atlassian. It could have been valued even higher.

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The archetype of success in Silicon Valley has long been young, male, and potentially a dropout from one of three or four elite universities. That may be slowly changing. This week, Canva announced a million founding round making its founder, Melanie Perkins, 30

That is why we created Canva — to make design easy and affordable for everyone, even if you have no design experience. MC: In January, it was announced that Canva is now valued at $ 1 billion . How did you celebrate? MP: It is important that valuations don’t become the only goal.

“We could have raised at a higher valuation from other investors, but that’s not something we wanted to do,” co-founder Cliff Obrecht told me this week.

Yet is also important to note that start-up valuations should really be taken with a grain of salt.

Don't just take my word for that.

"All these private valuations are fake ... It's all on paper, it's all a myth", Bill Gurley, a widely respected US venture capitalist, and an early backer of Facebook and Uber, famously said in 2015.

Start-up valuations have also been described by Bloomberg as "fuzzy", "insane" and "kind of made up".

It is difficult to succinctly explain why, but here is an attempt.

Venture capital firms that back start-ups typically demand provisions to limit their downside risk.

After all, investing in start-ups is risky. Most of them (anywhere from 60 to 90 per cent, depending upon who you listen to) end up failing.

Common protections VCs get when investing in start-ups include "liquidation preferences" that, in the event of a sale or float or wind-up, ensure they get paid back before anyone else; and "ratchets" that entitle them to more shares if a certain return threshold isn't achieved.

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The following essay is reprinted with permission from The Conversation, an online publication covering the latest research. National discussions of crucial importance to ordinary citizens—such as funding for scientific and medical research

I guess the question most people will ask is: when will the numbers internally make sense with the valuation externally? What is Canva ' s valuation ? How many $ 1 billion valuation companies are there?

Canva says it is the newest Australian unicorn — a private company valued at over US$1 billion.© Twitter/ @irontomlinsons Canva says it is the newest Australian unicorn — a private company valued at over US$1 billion. So, while the sale of a small percentage of a company at a certain price may imply a big valuation, the reality is much more complicated.

In any case, "unicorn" status is coveted by start-ups for a few reasons.

It's a powerful tool for recruitment - the battle for talent in the tech industry is fierce. It's also a good, easy news story to tell.

Canva's raising was picked up by various outlets, here and abroad, some of which don't normally cover the field. Hey, it's three days after the fact, and I'm still writing about it here.

The upshot is that many people (potential users) who hadn't heard of the service before, will have now. Well played.

Achieving a high valuation from investors, though, is not without risks.

It exposes a private company to the possibility of a dreaded "down round" in future.

"That's definitely a risk," Blackbird Ventures partner Rick Baker, one of Canva's earliest backers, told me this week. "But it's one we were obviously willing to take."

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If you’ve wondered how these numbers would look written out in full with loads of zeros, you can make use of one of my favourite maths “helpers”, the place value table: With these two particular numbers, I know that the “1” corresponds to “ 1 billion ” and “1 million” respectively.

Enterprise. The Truth About How A 12-Month Old Company Gets A $ 1 Billion Valuation . Eugene Kim. Based on those metrics, Slack would have made a little over million last year.

Seven "unicorns" suffered this fate last year - you could say they had their horns ripped off. They were sold, or had to raise money, at valuations below the $US1 billion mark.

At least one, Jawbone, a maker of wireless speakers and fitness trackers, went out of business.

For Canva, the prospect of this would seem remote.

Sure, the company is yet to turn an annual profit. In the most recent financial year, it lost $3 million, and it generated just $24 million in revenue.

But a start-up losing money in the early years of its existence is not unusual.

And Canva claims it turned cashflow positive last year, and has been so for four straight months.

Its revenue is said to be growing at triple-digit rates, and it's mostly recurring, something investors salivate over.

Its cost of acquiring customers is said to be extremely low (it doesn't spend much on marketing, and has grown through word of mouth), as are its churn rates (the percentage of subscribers quitting).

I could dive further into the weeds of the metrics used to value software companies here, but the reality is this: some very smart people are deeply psyched about the company's potential.

They could be wrong. If the company continues on its current trajectory, they will be right.

Regardless, Canva is certainly not the most ridiculous-looking investment out there.

Cryptocurrencies, or even closer to home, smaller tech stocks on the ASX, look much, much more questionable. And retail investors are punting on them.

Which brings us to arguably the most important point.

Start-ups like Canva are almost completely backed by sophisticated, professional institutional investors (themselves backed by gigantic entities such as super funds, which allocate only a small portion of their money to the sector).

If they make a failed bet (and they do), these investors have the financial strength to withstand any losses. And if they're right, they will also reap the rewards.

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Source: http://au.pressfrom.com/news/money/-52106-how-to-make-sense-of-canvas-1-billion-valuation/

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