Dec.

2014

Issue 4Page 1
May 2015

EVALUATION

EVALUATION:

Investing Insights brought to you by the students of NYU Stern

LETTER FROM THE EDITORS

INSIDE THE ISSUE

In business school we tend to focus on companies in the public

markets, reviewing case studies supported by endless amounts of
publicly available information. However, as of late, its impossible
to ignore the plethora of activity in the private markets. Uber is
purportedly raising money at a $50 billion valuation, greater than
the market cap of 80% of S&P 500 companies. Investors poured
$59 billion into U.S. startups in 2014, the most since the dot-com
era1. Previously common buzz words such as M&A and synergy
have been displaced with newer, sexier buzzwords such as
disrupt and innovate.

Brad Burnham:
Managing Partner, Union
Square VenturesPg. 2

We cant help but consider the framework that Howard Marks

has laid out in his memos investors are driven by two fears: the
fear of losing money and the fear of missing out. We would put the
venture capital market squarely in the second camp, with investors
clammoring to get a piece of the next big deal. While we are still
trying to make sense of valuations in a market where 15 to 18
times means 15 to 18 times sales, and not earnings, we are also
intrigued by venture capital. Thus, for the fourth issue of
EVALUATION, we elected to focus on Venture Capital Investing.
We hope to shed some light on an area where valuation runs high
and information runs low.
It is our pleasure to introduce the fourth issue of Sterns
student-run investment newsletter, covering a range of topics in
the venture capital space, in addition to some student-submitted
investment write-ups. We hope that you enjoy and take away a few
new ideas. Lastly, we would like to thank our interviewees for their
time and contributions, as this would not be possible without their
valuable insights. With that, happy reading!

Bryce, Ethan, and Sid

EV Editors

Per Pitchbook Data Inc.

(via Bloomberg research)

Matt Krna:
Partner, SoftBank Capital
Pg. 7
Prof. Aswath Damodaran:
Valuation ExpertPg. 11
Zeev Klein:
Co-Founder & Partner,
Landmark VenturesPg. 13
SIMR ConferencePg. 17
Rami Rahal:
Co-Founder, Blue Cloud
VenturesPg. 19
Mathew Farkash:
Co-Founder, Blueprint
HealthPg. 24
SIMR EventsPg. 28
Stern Investment Idea
Contest: Long MAS, Short
YOKU, Short HK: CAR
Pg. 29

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Page 2

Brad Burnham Managing Partner, Union Square Ventures

Brad Burnham

Brad Burnham is a managing partner at Union Square Ventures. Brad began his
career in information technology with AT&T in 1979. He held a variety of sales,
marketing and business development positions there until 1989 when he spun Echo
Logic out of Bell Laboratories. As the first AT&T "venture, Echo Logic was a catalyst
for the creation of AT&Ts venture capital arm, AT&T Ventures. When Echo Logic
was sold in 1993, Brad joined AT&T Ventures as an Executive in Residence. He
became a Principal there in 1994 and a General Partner in 1996. At AT&T Ventures,
Brad was responsible for 14 investments including Audible and Classic Sports
Network. Brad co-founded TACODA in 2001 before joining Fred Wilson to create
Union Square Ventures in 2003. Brad has a BA in Political Science from Wesleyan
University. He is married with two kids and lives in New York City.

EVALUATION (EV): You started your career in

information technology with AT&T. How
important was that early experience both on
the technology and business development
side?
Brad Burnham (BB): It was formative but it
wasnt critical from the perspective of building
relationships back then that are important to me
today. It certainly taught me a lot about how the
tech business works. Also, it taught me a bit
about how large organizations work. This has
indirectly been helpful since I now work with
young companies who compete with large
organizations. I understand what large
companies motives are and why its sometimes
very difficult for the large firms to compete with
start-ups. Even though large companies have all
the assets in the world, including market
presence, capital and products, there are
complex internal organizational dynamics in
large companies that make it difficult for them to
react to startups.
EV: How do you source new potential venture
investments? Could you briefly walk us
through the investment process?
BB: I think the venture capital business has
changed over the years. In the past, it was much

more opportunistic, much more of a filter

feeding process. You basically built a set of
relationships, which yielded a certain amount of
deal-flow, and then picked the best of those deals
for your portfolio. When we formed this fund
(Union Square Ventures) we took a very
different approach. We were very thesis driven
and we knew what we were looking for. We went
out looking for those particular deals, and began
talking about those deals on our blog, which was
a revolutionary idea in 2003-2004. Then, those
specific deals started coming to us as a result of
the conversations we were having. We dont
have a typical process, and I think a lot of
venture firms have evolved towards something
that is more thesis-driven and more focused than
historically so.
EV: Venture capital is inherently a high risk,
high return business. In a portfolio you have
a number of singles, in addition to one or two
home runs that more than pay for the strikeouts. Could you walk us through one of your
home runs? What about one of your strikeouts?
BB: Ill first talk about Indeed.com as a home run
because it also allows me to talk about deal
sourcing. It is important to understand the
difference between Web 1.0 and Web 2.0. From

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EVALUATION

our perspective, Web 1.0 was a bunch of offline

businesses moving online. For example,
Craigslist is really a 1.0 implementation of a
classified advertising business. If you look at
Monster, Career Builder or Hotjobs in the
employment space, these are businesses that

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learnings from that deal were one, that the

founders were very mission driven, and
therefore sub-optimized their own personal
economics. Second, in some ways the product
was implemented in a way that was fully
featured, but too complex in a number of

We didnt turn down Airbnb because it was too expensive or anything like that, we
turned down Airbnb because we didnt understand it, and because we made the
classic venture capital mistake we thought of ourselves as the customers.
have long existed offline in the newspaper world.
Moving them online cut costs, but did not
fundamentally change the business. We started
to think, Gosh, there isnt really a 2.0
implementation of employment advertising.
What would that look like? We decided that it
had to look like Search because in the 1.0
implementation you just put the ads online, pay
for the posting, and save the cost of printing,
trucks, and distribution. The 2.0 model should
flip that around, and employers should put the
ads online, and somebody should be searching
across all those ads. So, we went looking for that
business. After tapping our network to find our
guys (Indeed.com founders), we tracked them
down and started what was a 6-month long
effort to invest in their company. After some
convincing, we led a $5 million investment in the
company, which turned out to be all of the
primary capital they ever took. They built a
business that they sold for reportedly over $1
billion to a Japanese company called the Recruit
Corporation from our initial capital base so
that was a huge home-run in terms of the returns
on that initial investment. I think it worked really
well because it was a 2.0 implementation
competing with a lot of 1.0 implementations, and
also because the founders were very
complimentary.
On the failures, Ive got a lot of to pick from. Lets
go with Wesabe, which was an early Mint.comlike company. It was a utility for managing
personal finance. I think that my two key

different dimensions. So, the lessons for me

were: you can have a very well intentioned team,
a very experienced and talented engineering
team, but if you try to build too much yourself
and try to nudge your users too much, youre not
going to get the adoption.
EV: You have mentioned in one of your
interviews about how you passed on an early
investing opportunity in Airbnb. Looking
back and given what we know now about
Airbnbs valuation, has that made you change
your evaluation criteria when looking at
potential investments?
BB: Yes, but probably not in the way the
question implies. We didnt turn down Airbnb
because it was too expensive or anything like
that, we turned down Airbnb because we didnt
understand it, and because we made the classic
venture capital mistake we thought of
ourselves as the customers. When I saw the
original pitch, I couldnt relate to the idea that
someone was going to go sleep on a couch
someplace. Im 60-years-old, and I just do not see
myself wandering around the world sleeping on
couches. That was me assuming that Im the
customer, which is a terrible idea for a venture
capitalist in almost any situation because were
not usually the customers. We also did not think
of it as a network that was displacing the existing
model of providing temporary housing, which is
dominated by the very large and calcified hotel
industry. We didnt think of it as a way of more

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EVALUATION

efficiently using idle assets and using a network

to connect the owners of those assets with the
people who could take advantage of those assets.
We made two big mistakes there.
EV: You have made some notable exits such
as Twitter, Tumblr and Indeed. Can you talk
to us a bit about the thought process, when it
comes to exits, specifically around the issue
of timing?
BB: I doubt that as a minority investor in an
early stage company you ever have much control
over the timing of the exit. My partner, Fred,
likes to say that venture backed companies are
bought, not sold. That means that the buyer is
determining the timing. Whether or not a
company goes public is largely a function of the
public markets and also the interests of the
entrepreneurs. Were minority investors, along
for the ride, and dont generally get to decide
when or how a company is going to exit. I think
the most interesting thing to say about exits
these days is that theyre changing as the nature
of the companies that we invest in changes.
Venture Capitalists in the 80s and 90s were
investing in a lot of switches, routers, and chips
information technology infrastructure and
Internet infrastructure. Now, all of us are
investing at the applications layer that rides on

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went public and started taking a bunch of money

out for the shareholders, would the Redditors
hang out? A lot of the value is now being created
in these communities or in these networks, and I
think that exits have to reflect that fact. They
have to either include the value creators in the
value of the exit or not exit. It makes it tricky for
investors.
EV: Since this is a newsletter called
Evaluation, we have to ask what is the
valuation methodology employed at Union
Square Ventures (USV)? How does one assess
risk-adjusted returns both at the portfolio
as well as the individual company level? Is
there a typical hurdle rate for investments?
BB: We are primarily an early stage fund. We do
make some later stage investments, and in those
later stage investments we employ a number of
different valuation methodologies. There are a
bunch of interesting problems here. You now
have companies Twitter, Tumblr that can
have hundreds of millions of users, and relatively
modest revenues, and potentially no profits. If I
try to value these off some multiple of profits, its
going to be nearly impossible. Because we
believe in networks, and because we believe
these networks will create value, we have used
valuation mechanisms that show growth in

My partner, Fred, likes to say that venture backed companies are bought, not sold.
top of that. With the applications layer services,
the value is largely created by the users of those
services. In that model youre dependent on your
community to create the value in your service. If
youre dependent on the community to create
the value in your service, the network itself, the
brand of the network, has to be one that the
community embraces and believes in. Its a tricky
issue because it means that it would be hard for
some communities to be bought. A good example
of this would be Reddit right now. If Facebook
bought Reddit, would the Redditors still hang
out? I dont know, interesting problem. If Reddit

engagement. The more mature a company is, the

more well developed its revenue model is, the
more you can move towards more traditional
valuation models. As an example, when we made
the first investment in Twitter, there was really
only one other fund that was even open to the
idea of investing in them. Twitter had no idea
how they were going to make money and they
were pretty upfront about that. We were willing
to value them based on a multiple of user growth
and engagement. Others were looking for a
business model that they could latch on to,
though I think we made the right call.

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EV: You are a big believer and backer of peerto-peer services or the sharing economy. On
that front, anything particular you are
looking at currently that you think could be a
game-changer, and would like to share with
our readers?
BB: If you think about venture capital as a series
of generations, or the information technology
services businesses as a series of generations,
you sort of had Microsoft in the late 90s,
followed by a set of services that came out in the
first generation of the internet Yahoo!, AOL,
and Google probably and then you had a set of
services that came out in the second generation
Facebook, Twitter, Pinterest, and Whatsapp.
Each new generation emerges at least to some
degree because they undermine the leverage of
the prior generation. The very interesting
question today is: what undermines the Web 2.0
era? You know, what undermines Facebook,
Apple, Google, Twitter, and Pinterest? If you look
at all of those businesses, most of them are
defensible through network effects. Weve been
successful in investing in network effects for a

Page 5

that the tech sector is in a bubble? If so, how

have you altered your investment approach
to be more defensive? Do you find yourself
passing on opportunities because of high
valuations?
BB: The answer to that question is never simple.
There are aspects of the business that I do think
are overpriced, and there are aspects that are
underpriced. I think that consumer-facing web
services with growth and momentum and high
levels of user engagement - that space is very
competitive right now, and everybody wants to
be in those businesses. Some of these businesses
are very highly priced and I think it may be
difficult to generate venture-style returns. Back
to the Reddit analogy: you have creators and
consumers. Once you introduce a third party,
now you have shareholders. If youre going to
create economic value with this network, the
creators of that value are the creators and the
consumers. If you introduce shareholders into
the mix, and if you price something too high, the
question is where does that money come from?
It has to come from the creators and consumers,

I think the most interesting young venture capital firms tend to be created by
people who were former entrepreneurs.
long time, and I think we understand them pretty
well. So the question is, what would undo
network effects? One of the things that would
undo network effects is a shared public data
layer and/or a shared public truth. Thats why
were interested in Bitcoin. It isnt the currency,
store of value, or medium of exchange thats
interesting about Bitcoin rather, it is the
underlying technology, or the BlockChain
technology that allows you and me to have a
shared version of the truth that is visible to
everybody in the world. I think thats more
important than most people think.
EV: With all the hype over the NASDAQ
breaking the dot-com bubble high of 5000
for the first time in 15 years, do you believe

and if you take too much youre really testing

how strong that network effect is. Certainly there
is a lot of liquidity in these networks and a lot of
value in these networks, but in certain
companies those network effects are not as
defensible as others. Im not sure people are
being as discriminating as they need to be in
pricing those deals. I think the consumer facing
web services market the network effect
businesses is probably overpriced, generally
speaking.

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EV: Institutionally, how does New York City

accommodate its expanding start-up scene?
Will Silicon Alley ever come close to Silicon
Valley as the high-tech capital of the world?
BB: I think the question implies that Silicon
Valley and Silicon Alley will continue to be the
things that they are. I think that Silicon Valley
produces a lot of great companies and a lot of
economic value, and I dont want to compete
with them. I think New York has a different set of
characteristics. I think Berlin has a different set
of characteristics than New York and I think all
of them will create companies that are slightly
different. The startup culture in New York is
much more diverse, and I think a little more
socially minded. Its a little bit less tech-driven
and finance-driven, a little bit more change the
world driven. Thats not exclusively true, and
there are lots of good socially conscious
companies on the West Coast. I like the culture of
New York, the diversity of the startups, and I like
the fact that people who create startups here are
surrounded by people who are doing other
things. I think the answer is: 15 years from now
we wont really be thinking about Silicon Valley
vs. Silicon Alley. Well be thinking about a much
deeper sense of the culture within these
communities and the nature of the startups that
are being created within.
EV: Finally, what advice do you have for
students looking to break into the VC
___domain? What types of backgrounds and
skills sets do you look for in new potential
candidates?
BB: I think the most interesting young venture
capital firms tend to be created by people who
were former entrepreneurs. Take Andreessen
Horowitz, both Marc (Andreessen) and Ben
(Horowitz) were former entrepreneurs. I think
both Josh Kopelman and Howard Morgan at First
Round (Capital) were entrepreneurs first. Its
also true that in some ways, the environment is

Page 6

so much more dynamic today. If you were

investing in chips and routers, the engineering
degree and the finance experience at Stanford or
Harvard Business School was pretty useful, but
now the environment is so much more dynamic
that by the time you get out of business school
one of your colleagues from school may have
already built and sold a company, or started
their own fund. I would like to believe that were
going to end up with a larger number of smaller
companies in a more broadly diversified
economy. This means that there will be fewer
what people are now calling unicorns, which
means the returns will be less concentrated, and
smaller funds will do better. But also consider
this anybody that wants to get into the venture
business today, based on an assumption of what
it looks like now, will likely be looking at a very
different business by the time that they get into
it.
EV: Great, thanks for your time, Mr. Burnham.
We appreciate your thoughts.

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Matt Krna Partner, SoftBank

Capital

Matt Krna

Matt joined SoftBank Capital in 2011 and has over

a decade of investment experience in the
technology sector. Matt focuses on growth stage
investments in digital/social media, e-commerce,
marketing, and mobility. Prior to joining SoftBank
Capital, Matt was a Vice President with Investor
Growth Capital, the growth-stage venture arm of
Investor AB, where he focused principally on
Internet/digital media investments. Prior to IGC,
Matt was with Canaan Partners, an early-stage
venture firm. Matt began his career with Credit
Suisse First Boston and Donaldson, Lufkin &
Jenrette, where as an investment banker he
completed numerous M&A, equity and debt
transactions for companies in the technology
sector. Matt was a varsity swimmer at Harvard,
where he received an AB in History with honors
after three years of study. He lives with his wife
and three young children in New York City.
EVALUATION (EV): After college you spent a
few years as an analyst in investment
banking, first at DLJ and then at Credit Suisse.
At what point did you decide that you wanted
to get into venture capital? What impact did
living through the dot-com crash have on
your thinking there?
Matt Krna (MK): I loved my time as an
investment banker, actually. I graduated college
at a relatively young age, and there really wasnt

Page 7

another job where I could have received that

level of responsibility. I joined DLJ at the height
of the dotcom bubble, and was kind of forced to
jump in with both feet what I was allowed to do
with pretty limited supervision seemed totally
normal at the time but in retrospect it was pretty
crazy. I worked a lot, but at the same time I had
some great mentors, really smart and
experienced folks that were not only demanding
but also respectful of hard work and sincere
effort. So I probably enjoyed it more than most
people.
Living through the internet bubble taught me a
lot. One of the most important lessons was what
it meant to simply build a real business. At the
end of the day, a seed-stage startup needs to
become a business that can make money,
preferably at high margins while supporting
ongoing growth at scale, and if you cant
articulate how that will happen its a problem.
There were a lot of instances back then where
there wasnt even a plan. It also taught me that as
an investor, it is sometimes ok to do nothing:
funds that just sat on the sideline during the
peak of the craziness were extremely wellpositioned for the post-bubble period, when
valuations came back down to earth. I also
learned about the perils of herd mentality when
it comes to investing.
EV: In 2005 you left Investment Banking to
join Canaan Partners, a venture capital firm.
Could you speak a bit about that experience,
and some early lessons that you learned
there?
MK: My experience at Canaan was fantastic, and
Im still close friends with many of my former
colleagues there. Part of what I enjoy most is
being on a steep learning curve, and when I
started at Canaan I knew absolutely nothing
about evaluating potential investments. At
Canaan I was surrounded by colleagues that
were not only extremely intelligent, but also very
experienced in evaluating companies distilling
new opportunities down to the most important
areas of risk and potential upside and then

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looking at those aspects very deeply and

analytically. Just having the opportunity to
participate in meetings and learn how to be
intellectually disciplined and methodical, but at
the same time open to new ideas and nimble,
was the core of my training as a VC.
EV: After three years at Canaan, you joined
Investor Growth Capital, a VC firm that
focused on later-stage growth investments.
Can you talk about one notable deal that you
worked on there?
MK: One investment that comes to mind was our
investment in ID Analytics, a company that
focused on helping enterprises and consumers
manage the very difficult problem of identity
fraud. Looking back over the investments that

Page 8

What do you find particularly attractive

about these areas today?
MK: I joined SoftBank in 2011 because of some
of the significant trends that I perceived going on
in the market. First was the move of the world
towards mobile being affiliated with SoftBank,
one of the worlds largest and most successful
mobile companies, I felt would be of major
interest and benefit to potential portfolio
companies. Second was the eagerness of growthstage businesses to evaluate international
expansion earlier and earlier in their gestation
especially for B2C businesses or companies at
the application software layer. Business models
are becoming increasingly fungible, and not
laying claim on foreign markets quickly may
mean ceding them to local copycats. The last

At the end of the day, a seed-stage startup needs to become a business that can
make money, preferably at high margins while supporting ongoing growth at scale,
and if you cant articulate how that will happen its a problem.
Ive been a part of, they almost all involve the
intelligent use of data in some way, and in the
case of IDA that concept was very central to the
thesis. The reason that it was a memorable
investment for me was the way in which the
company weathered the 2008 financial crisis a
considerable proportion of the companys
customer base was comprised of large financial
institutions, and we worried that the downturn
would cause these clients to significantly pull
back their spending with us. What we found was
that the companys offering was extremely
resilient, and we ended up losing no customers
despite a perfect storm environment. It taught
me that even in the most difficult market,
companies that provide real value can succeed. It
was gratifying to see our investment thesis prove
out despite an adverse market that we didnt
predict.

factor was the rise of Asia as one of the most

successful investors in Asia, I saw SoftBank as an
ideal platform to bridge the US market and the
Asian market.

EV: Most recently you joined SoftBank Capital

in 2011. Please tell us more about your focus
area at SoftBank, Internet and New Media?

EV: Could you talk about your investment

process at SoftBank, in terms of evaluating an
opportunity and applying a valuation? How

In terms of what we call internet and new media,

thats really a catch-all to describe whats
happening as individuals experience with the
physical
world
is
overlaid,
filtered,
supplemented and augmented through the
digital world, with the mobile device as the
bridge. We believe that the always-on
connectivity provided by the handset and
eventually by other mobile and ambient devices
as well is rewiring the way that individuals
relate to their environment and to each other.
Thats a very broad and deep ocean of new
opportunities to swim in; for us the challenge is
finding the right spots.

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many opportunities do you see in order to

make one investment? How do you think
about evaluating risk, and upside/downside
probabilities?
MK: We see many hundreds or thousands of
opportunities per year, depending on what you
classify as an opportunity. Evaluation is a blend
of general questions we must answer how
large is the market opportunity, how well-suited
is the management team to address the market,
who is the competition and why is the companys
offering uniquely better, etc. and questions
specific to the opportunity which have to do with
the particular market being addressed, specific
technologies being utilized, the likelihood of
larger players in the space responding or a
myriad of other things. The important part for us
is gathering the right information and coming to
conclusions around the opportunity quickly and
efficiently without wasting a lot of time our
own or, even worse, the companys.
Evaluation of risk and balancing that with upside
is a blend of art and science. On valuation we rely
to some extent on public comps and other

Page 9

but one that stands out to me was Buddy Media,

which we had a chance to invest in at IGC and
which would have turned out to be close to a 10x
return in under two years (200%+ IRR).
Unfortunately I wasnt able to convince my
partners to bite. Over time Ive gotten better at
internal salesmanship every opportunity has
its champions and its skeptics inside every firm
but I realized that being in a culture that was a
bit more risk-comfortable in leaning into
valuations that may feel high was a better fit for
me.
EV: Youve served on a number of boards in
your capacity as a venture capitalist can you
tell us about one particularly interesting
experience as a board member? What are
some common mistakes that entrepreneurs
make, and what lessons have you learned
along the way?
MK: I really enjoy serving on boards and
working with management teams to help chart
the strategic direction of portfolio companies.
The intellectual exercise of puzzling out
responses to business challenges, debating, and

Id say one of the biggest mistakes that entrepreneurs make and one I try to
discourage them from making is trying to take on everything themselves.
benchmarks, but ultimately you need to balance
the potential upside if things go well against the
probability that they dont, and come up with an
acceptable rate of return to compensate for the
risk. The tricky part is that the landscape is
constantly changing right now its arguably
easier than any time in history to scale a
business to hundreds of millions of dollars in
revenue, but valuations are also relatively high
and competition for the best opportunities
extremely intense.
EV: Looking back, what is one deal that you
passed on, but wish you hadnt?
MK: Ive missed tons of investments (impossible
not to if youre in this business for long enough),

pushing is tremendously fun and even

occasionally helpful to the company on the
margin. However, there is only so much that a
board can do to influence the success or even
direction of a company its the management
team thats ultimately responsible.
One of the most gratifying experiences Ive had
recently was helping Criteo, one of my portfolio
companies, go through its IPO process. Going
public is a huge milestone for any business, and
Criteos IPO, one of the largest European tech
IPOs of the last several decades, was particularly
noteworthy. There wasnt an enormous amount
of work for the board per se most of the actual
effort fell on the shoulders of the CEO and CFO

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but just being along for the ride was fantastic.

Entrepreneurs make tons of mistakes, almost as
many as VCs! At the end of the day we are all
human and we are all fallible. Id say one of the
biggest mistakes that entrepreneurs make and
one I try to discourage them from making is
trying to take on everything themselves. Running
a company is an extremely lonely business; for
the CEOs and entrepreneurs I work with, I try to
just be open and available, as much of a partner

Page 10

EV: Do you have any advice for students

looking to get into the field? What is the best
way to go about it?
MK: Most venture funds are very small in terms
of personnel, and they very rarely hire. They
almost never hire in any kind of organized or
deliberate fashion. So, sending around a resume
and cold-pinging a bunch of VCs for
informational interviews probably wont get you
terribly far unless you get very lucky in terms of

We definitely seem to be at the high point of the venture cycle right now, with
private market valuations often at a significant premium to public market
valuations, and prices escalating faster than underlying business growth.
as I can be in the business. At the end of the day
its the CEO that must make the tough decisions
necessary to build a business, but I try as much
as I can to make that burden a bit more bearable
by providing some context, distance and
perspective.
EV: What are your thoughts on the current
venture capital environment? Are the
seemingly high private market valuations
justified? Do entrepreneurs have too much
power at the negotiating table? Are there
deals that youve passed on simply because
the valuation was too high?
MK: We pass on investment opportunities all the
time because of valuation. We definitely seem to
be at the high point of the venture cycle right
now, with private market valuations often at a
significant premium to public market valuations,
and prices escalating faster than underlying
business growth. We also see many different
types of investors coming into the venture
market without a lot of experience or sometimes
even discipline. Venture investing isnt a country
club theres no admissions committee and
anyone can do it, but making money through
cycles is a lot more difficult than it looks when
everything is going in one direction, as it has
been for the last several years.

timing. Like most VCs, I love seeing great

investment opportunities and if I see them
before my competitors, thats just wonderful. So,
what Id say is: Network. A lot. Find a way to
make yourself a useful, and then indispensable,
source of new and interesting opportunities to a
friendly VC. If you start to feel like an extension
of the team, youll have the best chance of
becoming a formal part of the team.
EV: Thanks for your time Mr. Krna, we
appreciate your insights!

May 2015

EVALUATION

Professor Aswath Damodaran

Valuation Expert

Aswath Damodaran

Professor Aswath Damodaran is a Professor of

Finance at New York University Stern School of
Business. Professor Damodaran's contributions to
the field of Finance have been recognized many
times over. He has been the recipient of Giblin,
Glucksman, and Heyman Fellowships, a David
Margolis Teaching Excellence Fellowship, and the
Richard L. Rosenthal Award for Innovation in
Investment Management and Corporate Finance.
Professor Damodaran received a B.A. in
Accounting from Madras University and a M.S. in
Management from the Indian Institute of
Management. He earned an M.B.A. (1981) and
then Ph.D. (1985), both in Finance, from the
University of California, Los Angeles.
EVALUATION (EV): Professor Damodaran,
could you speak to us generally about your
though process in valuing startups?
Professor Aswath Damodaran (AD): When
valuing young companies, you always start with
their story, because it is the story that drives the
valuation, not the other way around. In
particular, you are looking at how different parts
of the story play out in key numbers in your
valuation. A truly gripping story (which gives
rise to a large value, a la Uber) would be one
where the company has a product or service that

Page 11

is part of a very large market, the networking

benefits to get a large market share and the
competitive advantages to keep competitors out
(which delivers high profit margins). Thus, when
you get disagreements about value with young
companies, it is almost never because you
disagree on valuation inputs, it is because you
are telling different stories. Thus, my story of
Uber being a car service company with local
rather than global networking benefits gave me a
value of less than $10 billion for the company. In
contrast, Bill Gurleys story of it being a
transportation company with global networking
benefits yields a value closer to $50 billion.
For more on this topic, please see Prof.
Damodarans blog post on Uber from December
2014:
http://aswathdamodaran.blogspot.com/search?
q=uber
EV: What are some of the common mistakes,
or pitfalls, in valuing start-ups?
AD: The most common mistake is that few
people even value start-ups. Most bankers and
VCs price young companies and call that
valuation. Let me explain: if you apply a multiple
(to revenues, earnings, users or app downloads),
based on what other people are paying for
similar businesses, you are not valuing a
company but pricing it (and moving the multiple
to year three and calling it an exit multiple does
not change that). The reason given by
practitioners is that there is too much
uncertainty to do a valuation, but doing a pricing
is not making the uncertainty go away. It is just
pushing it under the surface and building on the
assumption that somehow the market will figure
out a way to put the right value on an uncertain
future.
EV: You are a world-renowned professor of
Corporate Finance and Valuation, but also do
some investing on the side. Do you think
there is anything in the space right now that
is grossly misvalued?

May 2015

EVALUATION

AD: Grossly misvalued suggests craziness and

is a word akin to bubbles, insofar as it is based
on the presumption that you think that other
investors are completely stupid. I start off with
the presumption that when I get a value that is
very different from the price, it is my mistake,
not market stupidity. It is true that I think that
social media companies are being over valued

Page 12

or that the PE ratio today is higher than it was

historically etc. That is not enough for me
because stocks can go up a lot and still be cheap
(if earnings go up even more) or the PE ratio
today can be higher than the historic norm, but
stocks can be a bargain if interest rates have
collapsed. I believe that in todays low interest
environment, I would rather buy stocks than

When valuing young companies, you always start with their story, because it is the
story that drives the valuation, not the other way around.
because investors are not considering that (a)
the market is not big enough to sustain all of the
companies (current and yet-to-come) that are
likely to be fighting for market share, (b) growth
is going to be far more expensive than is being
currently estimated and (c) the same factors that
allow for easy entry and scaling up will conspire
to hurt companies down the road. Does that
mean that I think every social media company is
overvalued? Not at all, since the winners will still
win big.
I consider myself a value investor, though my
definition of a value investor is not of the Ben
Graham variety (where you look for mature
companies trading at less than their book value),
but simply requires buying stocks when the
price is less than value. It is for that reason that I
go looking for opportunities where it is darkest
and there is the most uncertainty: in young
companies, distressed sectors, or countries with
significant political risk.
EV: Do you believe that the tech sector is in a
bubble? After reading through your response
to Mark Cubans quote about a private sector
bubble, were very curious to hear your
thoughts.
AD: If someone makes a statement that the
market (S&P 500, Nasdaq, social media) is in a
bubble, that person then has the obligation to
back it up. I find that most people who claim
bubbles base it on surface variables, i.e., that
stocks have gone up a lot over the last five years,

bonds, and if you believe interest rates are too

low, your problem is with the bond market, not
the stock market.
For more on this topic, please see Prof.
Damodarans blog post on bubbles from March
2015:
http://aswathdamodaran.blogspot.com/2015/0
3/illiquidity-and-bubbles-in-private.html
EV: Professor, excellent thoughts as always.

May 2015

EVALUATION

Zeev Klein Co-Founder &

Partner, Landmark Ventures

Zeev Klein

Zeev is a General Partner and Co-Founder of

Landmark Ventures, a leading investment bank
and corporate advisory firm working with
growth-oriented private companies, public
companies and investment funds. Founded in
1995, Landmark has worked with over 350
emerging growth ventures across the enterprise
software, digital media, telecom, cleantech and
healthcare sectors. A significant portion of these
activities include cross-border transactions
involving the US, Canada, Europe and Israel. Zeev
graduated with a BA in Economics from
Northwestern University and has an MBA from
NYU Stern School of Business. He founded and is
actively involved with several of Landmarks
annual conferences including the Social
Innovation Summit and the Israel Dealmakers
Summit.
EVALUATION (EV): You first gained
experience in the Venture Capital space while
working in the VC & Strategic Investment
division of Chase Manhattan Bank. Can you
talk to us about how you analyzed and
evaluated emerging technology companies
back then? Are there any rules of thumb
that are still currently applicable?

Page 13

Zeev Klein (ZK): On one hand, the world has

changed a lot from the time I began my career in
the 1999-2000 dot-com boom era. On the
other, the more things change, the more they
stay the same. Companies then and now are
receiving huge valuations, like the batch of
unicorn startups worth more than $1 billion.
Young companies at the seed stage are getting
lofty valuations as well, often with pre-revenue
companies commanding starting valuations of
$5-10 million with no customers or working
product. I would say the biggest change is
quality; back then many things with a dot-com
were overvalued without regard for fundamental
business metrics. Things today are more obvious
than they were then business and consumers
are spending their time, and their money, online,
which allows for real businesses to be built.
Todays crop of clear winners like Facebook,
LinkedIn, Twitter and Uber are much more
durable than those from the last cycle based on
the underlying financials.
EV: Landmark Ventures (LV) is a unique
advisory firm, and has pioneered the ABC
Model for venture development, providing
Advisory, Banking and Conference resources
to your portfolio companies. Why do you
prefer
this
model
as
opposed
to
concentrating on just one of the resources?
ZK: We think that growth-oriented private
companies need a variety of services in order to
be successful. Its a model that weve increasingly
seen many firms use, most notably venture
capitalists at Andreessen Horowitz who have
taken this holistic approach towards providing
venture development services. For Landmark,
we feel this array allows us to better meet the
growing needs of companies across all key
phases of the corporate development lifecycle
from early-stage funding through scale and
growth, to a strategic exit/liquidity event. Tightly
integrating these offerings within our platform,
we are able to offer our client base with a
comprehensive series of entrepreneur-to-exit

May 2015

EVALUATION

resources and professional capabilities. Thats

what I call a competitive advantage!
EV: LV has significant experience in crossborder transactions involving North America,
Europe, China and Israel. Could you describe
an interesting cross-border deal that you
recently worked on, whether in an advisory
or funding capacity?
ZK: We are often brought in as investment
bankers or strategic advisors to assist companies
during the hardest part of their growth new
market entry or expansion. For example, we are
currently working with multiple Israeli
companies who are looking to enter the U.S.

Page 14

more broadly with many of our early deals and

clients. Today my work has shifted and, as our
team has grown, I am involved in a much smaller
number of deals per year - which I still love!
In terms of growth, per your prior question, I
think innovation will start to permeate a number
of somewhat traditional industries. Agriculture,
job
creation,
urbanization,
increased
consumption,
energy,
healthcare
and
infrastructure are powering a fast-growing (and
young) middle class, and an average annual
economic growth rate of around seven percent
for some countries. Looking at Africa for
example, the economy has tripled in size since
2002, and six of the worlds 10 fastest-growing

Looking at Africa for example, the economy has tripled in size since 2002, and six of
the worlds 10 fastest-growing economies are there. On the technology front, we
can learn a lot from how Africa is approaching wireless and mobile technologies to
overcome barriers to entry in the global marketplace.
market and establish their first beachhead
customers. Similarly, we are involved with a
public Chinese company who is seeking growth
through acquisition and currently looking at a
massive >$1 billion deal which would
immediately put them on the map. We are also
advising two public U.S. corporations who are
looking to expand into Eastern Europe via direct
investment in startups. The world has become
very flat, innovation is everywhere, and
companies looking for a competitive advantage
must now seek disruptive technology regardless
of its point of origin.
EV: What is your personal area of focus at LV?
What is your view on the evolution of the
growth oriented and emerging market
investing landscape and where do you see it
headed in the long-run?
ZK: As a Co-Founder at Landmark, a lot of my
time is spent on management, strategy and
vision. Earlier in my career I was involved a bit

economies are there. On the technology front, we

can learn a lot from how Africa is approaching
wireless and mobile technologies to overcome
barriers to entry in the global marketplace. All
this leads me to believe we are going to see a few
major trends: 1) major new multi-billion dollar
startups that spring up from nowhere and go
viral even faster than those we have already
seen, capturing and captivating the worlds
attention, 2) an increasingly younger and
increasingly more global base of successful
entrepreneurs, and 3) those entrepreneurs
providing major disruption and value creation in
basic industries like energy, health and
education that are ripe for new solutions.
EV: What valuation methods do you use at
LV? Given the breadth of your portfolio, have
you developed any proprietary frameworks
for specific technologies/ industries? Or does
a one-size-fits-all approach work, at least as a
starting point?

May 2015

EVALUATION

ZK: Company valuation is one metric used in

closing deals, but it must often be taken into
holistic consideration regarding the entire deal.
Depending on the stage of a transaction, other
factors like voting/board rights, conversion
terms on bridge loans/convertible debt,
participating preferred investing, and ratchets
may wind up being much more critical in cases of
extreme positive or negative outcomes. Today, in
an era of a strong bull market, a lot of previous
valuation techniques are massaged to create an
environment of whatever the buyer will pay.
Generally speaking, the later stage the deal the
more traditional valuation comes into effect

Page 15

personally, the degree of risk/return doesnt

make sense on paper. We see more upside and
opportunity for investors of all types in the
earlier stages, where contrary to your question,
we think the pace of deal flow will only increase.
EV: Internet of Things (IoT), CyberSecurity
and Big Data are some of the VC verticals
gaining mainstream attention. Which specific
VC vertical excites you the most?
ZK: You hit our big three! There is a lot of
attention now across all of these, and they share
the same common core that the amount and

The most common [valuation technique] is the VC Method, where an investor will
look at their target percentage ownership in say the context of an exit, and work
backwards to arrive at a negotiated valuation.
market comps, discounted cash flow, or revenue
multiples. Those tend to be starting points of a
negotiation, but honestly the most common is
the VC Method, where an investor will look at
their target percentage ownership in say the
context of an exit, and work backwards to arrive
at a negotiated valuation.
EV: A number of founders and start-up
management teams have recently succeeded
in monetizing their holdings at record high
valuations. How sustainable is this relatively
easy access to money? How is LV positioning
itself for an environment where deal flow
shrinks and opportunities diminish?
ZK: Yes, we are certainly in a relative high period
in terms of exits, priced rounds and overall
valuation. In order to make money, the old adage
of buy low and sell high still holds true. Investors
can certainly make money buying high and
selling higher, which has been a very effective
strategy for some in this market. But for me

velocity of data is only increasing. More

consumers and businesses are using the Internet
on a global basis, creating vastly more data. More
devices are increasingly becoming connected,
adding to the volume of information. All of this
needs to be analyzed, and the bigger the data
stream the harder to find actionable insights.
And it all needs to be secured. The big challenges
of tomorrow will intersect these three big trends,
leading to an unbelievable amount of wealth
creation for those who provide best-in-market
solutions for even just small pieces of just one of
them.
EV: Given the number of boutique advisory
and VC focused firms in New York City, do you
perceive any competition risk for LVs core
offerings? Are you actively looking at
increasing LVs market share in other
emerging entrepreneurial geographies such
as Israel, Finland or China?

May 2015

EVALUATION

ZK: Competition is healthy. It makes you work

harder, it drives you to excel, and it serves as a
barometer of success in comparing and

Page 16

my greatest privileges to be able to give back via

platforms like our Social Innovation Summit
where we galvanize our network in an actionable

Venture Capital and angel investing can be a very rewarding and lucrative part of a
balanced portfolio, but everyone should remember that its also a risky one with the
potential to lose money on a material part of your investment.
constantly improving yourself relative to peers.
Its a big market for boutiques, and we dont see
any issues with regards to saturation or
stagnation. That said, in order to win you have to
have what we sometimes call a unique and
repeatable competitive advantage. For us, those
points are going to be sector expertise in
domains like Digital Media and Enterprise
Software, and geographic expertise in key
markets like Israel. While we have looked at
additional expansion, with China being the next
most appealing market, we also see many
growth opportunities within our current scope
of operation. So its a balance between
optimizing and maximizing your current market
share, versus looking for new growth in new
sectors. For now, we are happy.
EV: In the past you have described yourself as
a capitalistic, for-profit individual focusing
on business innovation. As a champion of
events such as the Social Innovation Summit,
do you believe such initiatives are succeeding
in bringing together business and social
innovation? Or is something more required?
ZK: I dont see a conflict with the alignment of
Profit and Purpose, and in fact, I believe that
most successful companies and individuals
require a balance of both. Said differently, I
believe that your values drive your valuation.
Consumers want to buy products from good
companies; employees want to join and stay with
great bosses and great firms; shareholders and
stakeholders are more likely to own your stock
in the long term if you can demonstrate financial
and social results. While the majority of my day
is spent running the business, I consider it one of

way around the opportunities for businesses to

drive social change.
EV: Thanks for your time Zeev, anything else
you would like to add?
ZK: Id just add for students, alumni and other
readers who are looking to get more involved
with startups and investing to remember that
markets are cyclical. Past performance is not an
indication of the future returns. Venture capital
and angel investing can be a very rewarding and
lucrative part of a balanced portfolio, but
everyone should remember that its also a risky
one with the potential to lose money on a
material part of your investment. There are some
lower risk methods to get started, by joining an
angel investment group or getting involved with
an equity crowdfunding platform like OurCrowd.
You may lose some individual upside from any
one specific deal, but in the long run, I prefer the
tradeoff with what you gain via portfolio
diversification.
EV: Good advice, thanks for sharing your
perspective.

14th Annual SIMR Conference Summary Investing in a Post-Fed

World
With the conclusion of quantitative easing in the United States and the widely held expectation that the
fed funds rate will increase for the first time since 2008 this year, the investment community faces
another period of transition. Recent turmoil in the commodity markets and continued challenges in many
of the worlds largest economies create great challenges for the Fed and more uncertainty for investors.
At the same time, structural changes in the industry and the reevaluation of fundamental concepts have
changed how opportunities are approached.
With these considerations in mind, the Stern Investment Management and Research Society (SIMR) held
its 14th annual conference on March 27th, 2015 with a series of distinguished speakers discussing a
variety of topics critical to the current investment climate.
The days first speaker, NYU Stern Associate Professor and Principal at AQR Capital Management,
Andrea Frazzini, reviewed the history of and shared his updated research on the size premium in the
equity markets. While the existence of a size premium for small capitalization stocks was largely
discredited in the decades after its proposal, a more detailed analysis shows that once accounting
for quality, a significant size premium does exist. Controlling for factors of profitability, growth,
safety, and payout, small capitalization stocks have outperformed by nearly 6% annually and the alpha
exists globally, across time, and across size deciles even after accounting for other potential premiums
such as illiquidity.
During the days first panel, a Conversation with Emerging Managers, several successful managers gave
advice on selecting managers and starting a fund. Although the backrounds of the panelists differed,
several common themes emerged: To stand out among the thousands of smaller funds, good
performance and a repeatable investment process are important, but idea communication and
creativity are also essential skillsets. Having strong partners, from both operational and personal
perspectives, and enough cash on had to survive the early years, are also critical to success. All the
panelists agreed that patient capital and long-term relationships are highly valuable in the industry.
At lunch, Keith McCullough, founder of Hedgeye Risk Management, provided an overview of the
current macroeconomic outlook and the impact on potential investments. He highlighted that weakness
in commodities and quantitative easing in Japan and Europe placed Federal Reserve Chair Janet Yellen in
a very different environment than her predecessor. He predicted that continued slow growth, low
inflation, pressures on the US oil industry, and a strengthening dollar will result in continued low
yields on long-dated treasuries. In the long-run, McCullough stressed that demographics, and in
particular aging populations in many developed countries, are critical to understand and are often
overlooked by investors.

On the days second panel, The Golden Age of Activist Investing, several prominent members of the activist
community discussed its evolution. Sitting at the crossroads of hedge funds and private equity, the
prominence and acceptance of activist investing has grown, and today it is increasingly viewed as a
distinct asset class. Examples of clear misbehavior by company managers, the advent of proxy advisors,
and acceptance (and even encouragement) by traditional mutual fund managers have all driven
activism's acceptance. The panelists highlighted that firms targeted by activists outperform for
several years after activist involvement and performance by activist funds has been strong. The
panel generally agreed that the growth of activism was not over.
During the third panel, Gaining an Edge in Equity Investing, moderated by CNBCs Courtney Reagan, four
portfolio managers discussed their approaches to outperforming the market. Manoj Tandon of Pzena
Investment Management indicated that he focuses on cyclically depressed companies not affected by
structural change and performs deep bottom-up analysis. David Dineen of Pinnacle Associates spoke
about finding high quality and undervalued securities within the small cap universe, which he believes
helps minimize volatility. Siddharth Thacker of Signpost Capital spoke about the importance of
examining history to understand fads. Mark Lee of Mountaineer Partners indicated that he believes
that all investment opportunities have been thoroughly analyzed on a backward looking basis, such that
identifying nonlinear forward opportunities is crucial to achieving outperformance.
The days final speaker, Michael Mauboussin, Head of Global Financial Strategies at Credit Suisse,
discussed a number of behavioral biases, how to separate skill from luck, and how to put behavioral
finance into practice. His advice for managers to successfully account for behavioral biases
included performing a premortum on an investment idea, creating a red team to challenge
ideas, and sizing an investment appropriately for edge level and calibrated level of conviction. He
also explained that in many fields including investment management there had been an absolute increase
in skill but a decrease in the standard deviation of skill level, which was driving structural changes in
favor of passive investment.
All in, it was a very insightful conference, and we very much look forward to seeing you at our next
conference, in Spring 2016!

Keith McCullouh of Hedgeye Risk Mangement

Equity Investing Panel moderated by Courtney Reagan

of CNBC

May 2015

EVALUATION

Rami Rahal Co-Founder,

Blue Cloud Ventures

Rami Rahal

Rami Rahal is a Co-Founder and General Partner

of Blue Cloud Ventures. At Blue Cloud Ventures,
Rami focuses on early and growth stage
investments and his areas of focus include:
enterprise mobile, PaaS, SaaS, new media and
infrastructure. Prior to Blue Cloud Ventures, Rami
was an investment banker at Madison Park Group
where he worked with a range of software and
tech-enabled services companies on M&A and
fundraising transactions. Previously, Rami was at
Accenture in their IT Strategy Group where he
advised Fortune 50 companies including Pfizer,
Verizon, Walgreens, AT&T, TransUnion and State
Street. Rami co-founded Jot Messenger, a NYbased multi-platform mobile and web instant
messaging company. Rami is a graduate from the
American University of Beirut (B.Eng. Mechanical
Engineering) and Columbia University (M.S.
Operations Research).
EVALUATION (EV): Before you got into
venture capital, you were an entrepreneur
yourself could you talk about your
experience co-founding Jot Messenger? Is this
a similar platform to WhatsApp?
Rami Rahal (RR): Its exactly like WhatsApp. I
think the experience at Jot really drove me
towards the VC model. When I was at Columbia,
everyone was using BBM (BlackBerry

Page 19

Messenger), and we did not understand why the

iPhone didnt have a similar feature (how
iMessage is now). We thought we should look
into developing a cross-platform messaging
system that could be used by everyone. In 2009
the update to iOS had the push functionality to
it, so this was the ideal time to start Jot.
Similar to other early tech firms, neither my cofounder nor I had any prior experience in the
tech space. We managed to raise some money
and developed the initial stage of the application.
We thought we were going to raise a lot more
money, and had commitments tied up, but
people pulled out at the last minute and we
found ourselves with a development team but
with no money to fund them. Finally we just had
to put an end to it.
I believe it was a great idea, but we lacked
execution. I learned that I am not the smartest
tech person out there, and that it requires some
prior entrepreneurial experience to be really
successful in this space. Its always tough in the
beginning. I looked at the VC route, and noticed
that they (VCs) get to choose the best
entrepreneurs to partner with, and therefore
their chances of success are much higher. If you
assume a 10% probability of success for a startup, which is still high, and are able to invest in 20
of these start-ups (run by people who are
probably much more qualified than I am), you
have a much higher chance of success.
EV: What gave you the idea to found Blue
Cloud Ventures (BCV), and what is your
niche?
RR: After I failed at building and growing Jot, I
found myself looking for a job in 2009, which
wasnt the best time to be looking. Everything,
including the VC industry, was kind of upside
down. After working at Accenture, soon after
Columbia, I realized that a big corporate
environment does not really suit me its kind of
restraining, a bit slow, and very structured. I
decided to look at small boutique investment

May 2015

EVALUATION

banking firms, and ended up at Madison Park

Group. At Madison, I got a chance to interact with
the VCs, but as a service provider you still are not
that close to the core VC function. VC is a very
pedigree driven business, and jobs dont come up
very often. The market was much more complex
than I expected, with so many different firms
doing so many different things, and the skillset
required to land a job in early stage VC financing
is unique to the industry, nothing like growth,
PE, or debt. You have to have different
characteristics to be an early stage Venture
Capitalist.

Page 20

be done (fundraising). However, our limited

background in this space meant we really had to
hustle, play on emotions even. We finally ended
up raising a $15 million fund, which felt really
great.
In order to quickly get our first close, we lined up
three investment opportunities companies we
had relationships with through the investment
bank that were raising rounds. We decided to
keep it simple and focus on one sector
enterprise software. Its a sector in which we had
done a few deals, so we understood it, and it

There is always talk about fund vintage, but the way I see it, if the market is really
frothy you should not deploy the capital. Your main goal should always be to
maximize the value for your investors.
Along the way, I noticed that my [Blue Cloud] cofounder, Mir, was co-investing in a lot of VC deals
that were funneled through the investment bank
Madison Park. I became curious about the coinvesting route and discovered that VC firms are
quite open to this. Mir and I started out really
small, knowing that our investments might not
give us 10x or 20x returns. We wanted to
identify really stable companies that can return a
decent 3x, and by investing alongside the big
guys, who end up doing most of the work, you
get to piggy-back a little bit.
EV: I imagine that fundraising is no walk in
the park, could you take us through the
process of getting Blue Cloud up and
running?
RR: Initially, we wanted to start Blue Cloud as a
$3-$5 million fund. I soon realized that a $5
million fund demands a similar infrastructure
and thought process to a larger fund, so why not
aim a bit higher. Raising the first fund was one of
the hardest things I have ever done. In the first
fundraising trip, I naively thought that if I
pitched to about 50 people, 10 to 15 of them
would write million-dollar checks and we would

offered stable recurring revenues. We decided to

focus strategically on the growth-stage because
in early-stage it can take anywhere from 4-5
years to show good returns, and you cant really
show exits companies take some time to gain
traction and get going. Also, with a $15 million
fund, you cant really invest more than $1 million
in any one name - you have to diversify across,
Id say, 10 names at least. This effectively ruled
out leading growth rounds, which requires a
minimum $10-$15 million per company and then
some follow on capital.
EV: Could you briefly speak about some of the
challenges/difficulties of starting your own
fund?
RR: Given that BCV is a small fund, there is little
room for error. If Sequoia Capital doesnt do
great with one of their funds, I doubt it will be
tough for them to raise another. For us, this
would be fatal. So when we started, we had to be
very conservative. The markets helped us out in
the early years (2012-2013). Valuations had still
not ramped up, and we benefited from investing
early on in a less frothy market. At that time,
valuations were not crazy and companies had
limited access to capital. Thankfully, this allowed

May 2015

EVALUATION

us to make some exits at the higher end (2015).

It was a combination of hard work and luck that
helped us early on.
EV: Your firm has a very unique investment
strategy, which seems to fill some unmet
demand in the industry. Why are there
inefficiencies in the late-stage private
funding markets?
RR: In 2014, we started thinking about next
steps, as our end goal was not just to run a $15
million fund. We decided to target a $50 million
fund. To do this, we had to streamline our
process and use what we learned from coinvesting to refine our strategy and focus on two
main investment theses, our first of which is latestage investing. While we were sourcing deals
we noticed that our offering was very appealing
to CEOs and VCs who had companies that were a
year or two away from exit and needed to raise a
sub $25 million round.
Cross funding is a concept wherein VCs raise
new capital to provide follow on rounds for
companies in a prior fund. This is not ideal, and
in order to avoid this VC firms tend to set aside a
reserve to invest in subsequent rounds along the
way. However, many times, especially if the IPO

Page 21

they are generally quite receptive if its not going

to change the dynamics much. We make sure
were flexible enough to write a check from
anywhere between $2 million and $10 million,
and therefore have become the go-to guys when
these companies are trying to raise a quick sub
$25 million round. Now mind you, quick money
does not mean that we are not doing our due
diligence, it is still a lot of work.
EV: So, can you please shed some light on
your second, growth stage, strategy?
RR: Our growth stage strategy is a bit different.
As we were building our fund, we realized that
we needed better access to the tech community.
As an investment banker, you are a service
provider and you arent always going to be out
there getting your hands dirty. We decided to
rally up some entrepreneurs and give them
ownership stakes in the fund essentially
making them active. We let them work with us as
advisors, and at the same time they were part of
the fund; with that we got a lot of referrals. The
issue we had with only doing late-stage coinvesting was that you cant be proactive in
terms of allocating money, so thats when we
decided to pursue growth, to go after those
opportunities.

This business is about hustling whether you want to raise a fund or work for one.
market has cooled, the reserves run dry before
the company is able to go public. One solution is
to access credit lines, but this is not optimal. The
solution is typically to turn to other VCs, which
then raises the issue of control/board seats.
Additionally, most of these later stage funds
dont want to invest anything less than $25
million. This is where we come in.
To summarize, there isnt really an institutional
investor that does what we do in late-stage. I
think weve identified a huge opportunity in the
market. If we just call a company and ask them if
they are interested in raising another $5 million,

With growth, were targeting companies that do

about $20 million or so in revenue. These are
companies that are looking to raise fourth
rounds, and exits are usually about five years
out. Many of the small companies looking for
growth capital struggle because they dont have
the connections to access it. We, however, do
have those connections through the investment
banking side. We know a lot of the large growth
funds, so well reach out to them when the right
opportunity comes to us, introducing them to a
great company, and then co-invest alongside.

May 2015

EVALUATION

On the growth stage, we act as a matchmaker: we

find the deal and put everything together. We did
this with Resumator (recruiting software); we
put them in touch with Volition Capital and then
co-invested with Volition. Weve recently done
this with one of our retail software companies
Reflexis. There was a big investor that wanted to
exit but the CEO of Reflexis had just built this
incredible product and revenues were expected
to double. There was a huge growth opportunity
on the horizon to raise value, so we came in with
Sageview Capital (the backers of GoPro) and
proposed a recapitalization. We did the re-cap
and then ended up co-investing with Sageview.
EV: Can you talk about a few of your exits in
recent years?
RR: We have had two exits so far and they both
have been very successful. The first was a
company called AFS Technologies (ABRY
Partners and Goldman were the other investors).
We sold them to Court Square Capital and the
company still continues to grow in a similar
fashion. The second company was Beyond Trust,
acquired by the government focused PE firm
Veritas Capital. It was our first software solution
company and proved very successful for us.
We have returned a lot of money to investors,
and have lined up a couple more exits this year,
enabling us to return more than was initially
invested in the fund. I think we have made solid
investments. There is always talk about fund
vintage, but the way I see it, if the market is
really frothy you should not deploy the capital.
Your main goal should always be to maximize
the value for your investors.
EV: Your expeditious due-diligence process is
one of your competitive advantages. How do
you get comfortable with a potential
investment in just 2-3 weeks? Can you walk
us through the process?

Page 22

RR: Although we are a smaller fund, we have a

very quick and heavy diligence process. In most
of the co-investing deals we have done we share
diligence with big lead firms. Given the speed
with which we operate (its almost like high
frequency trading), we have to be faster than
everyone else, because that might be the
difference between getting the deal and not
getting it. When we are working on a deal, given
our size, we get diligence done quickly by
focusing solely on business diligence. All the big
firms have to do the legal, accounting and tech
diligence. Since we focus only on business
diligence, this gives us some flexibility and we
use it as an advantage. If you think about it the
other diligence decisions are mostly binary
there either is or isnt a problem. What matters
most is understanding the business itself, so
thats where we focus all our resources, and then
share this information with our larger partners.
This is the advantage of being a co-investor it
gives us an opportunity to look at far more deals
than we would have otherwise.
EV: What are some trends that you are seeing
right now in your focus areas, cloud
enterprise and mobile applications? Why are
these good spaces to invest?
RR: When you look at the enterprise software
space today, most of the companies are cloud
based very few have the licensed model. I think
trying to raise money for a licensed model is no
longer a good idea, mainly due to the lack of
recurring revenue. With cloud, it is fairly easy to
model recurring revenues. There are very few
key metrics to consider in these cases how
much are cloud companies paying to acquire
their customers, what is the long-term value,
what is the competitive landscape, and what is
the price-point. Next, youll want to consider the
growth rate, acquisition rate, and trend rate.
With a few of these metrics you can build a
model that captures the structure of the
company.

May 2015

EVALUATION

Second, the cloud based idea actually opened up

the software business to virtually anyone.
Software used to be purchased by only the
largest companies you had to buy a license, pay
for tech maintenance, and have all the
infrastructure in place. Cloud is not something
new. The concept has been around since 2000,
but the problems had always been with
connectivity, in terms of information flow, and
access for these small businesses. Now, with
recent improvements in infrastructure and
connectivity, cloud based solutions are much
more accessible.
All the big enterprise software guys have a
business model that is based on licensing, and a
lot of these big companies are trying to
transition from license to SAS (Software as a
Service). For example, SAP and Oracle are both
transitioning, and they decided not to build their
own cloud services internally, but rather to let
some really smart young entrepreneurs do it,
and then pick up the winner. Thats why you now
see all these big exits in cloud. We focus on SAS
because there are and will continue to be exits,
which is very important. Also, these are our
premium exits if you are a unique company in
this space, it is kind of inevitable that you will get
acquired for a high multiple.
Right now, machine learning or anything
predictive is really hot. We think there is a huge
opportunity in the payments SAS space, or the
security infrastructure space. We are definitely
vertical agnostic. We are invested in a PLMS
(Product Lifecycle Management Software)
company. If you ask anyone about PLMS, most
people dont know much about it, as there are
only 3-4 big players. We have one of the best
open source companies in this space and theyre
disrupting the whole market. Theyre providing a
lot more functionality compared to competitors,
and doing it for 80-90% less; their services are
now being adopted by some of the largest U.S.
corporations. Its a small niche company but we
see it as a huge opportunity in a market that we
understand, so of course were invested.

Page 23

EV: You are both an entrepreneur (founder of

Blue Cloud) and an investor in entrepreneurs
what is it like to be on both sides of the
table? Any advice for people looking to start a
finance company today?
RR: First, this business is about hustling
whether you want to raise a fund or work for
one. You need to understand what the specific
VC firms focus is being an early stage VC is
very different than being a late stage VC, and
very different from PE. You need to understand
what your skills are, how youre going to add
value, and you must show genuine interest.
Never go into a VC interview without knowing
their portfolio inside out, and their strategy. Its
like going into a trading interview without
knowing anything about the markets. Be
proactive and know what youre talking about.
EV: Great insights Rami, and thanks for the
time!

May 2015

EVALUATION

Mathew Farkash
Co-Founder, Blueprint Health

Page 24

professional working environment. Upon

reflection of my time in banking, I found the
most interesting moments to be the exposure
and interaction I had to senior operating
executives. I realized relatively quickly that I
wanted to return to working in an operational
role, ideally where I was building a solution to a
problem.
I ended up starting Blueprint Health with a
friend who was a physician entrepreneur. Four
years later, we have 60 portfolio companies and
were named a top 10 most innovative healthcare
company in the world by Fast Company.

Mathew Farkash

Mathew thrives on connecting good people to

good opportunities. He is the founder of Blueprint
Health, which was named a top 10 most
innovative healthcare company in the world by
Fast Company and is an investor in and advisor to
over 60 early stage companies. He serves as the
Entrepreneur-in-Residence and an Executive
Board Member at Venture for America, a nonprofit that leverages entrepreneurship for job
creation in cities primed for revitalization and is
the founder of Blueprint Summit, a membershipbased community focused on new models of social
impact and philanthropy. Mathew is a graduate of
Brown University and NYU Stern.
EVALUATION (EV): As a Stern grad, we would
love to hear about your transition from NYU
to UBS and eventually on to found Blueprint
Health. What prompted you to start out in
Investment Banking?
Mathew Farkash (MF): Ive always enjoyed
learning and have never viewed my lack of
experience or knowledge as a barrier to
pursuing certain jobs. For me, banking was new.
And while I hadnt set out to transition in to
banking when I came to Stern, it was a learning
opportunity for me both in how to think about
business from a different vantage point as well
as gaining exposure to a fairly unique type of

EV: When did you first get interested in the

Venture Capital space? Was this something
you looked into while you were at Stern?
MF: My interest is really grounded in solving
problems and building solutions. Blueprint
Health served as a platform to impact the growth
of startups at scale. Blueprints model is unique
in that as our role is one part investing and one
part operational.
Ultimately, we are a fund that is measured by our
returns. But we take a very hands-on approach
to helping our companies get started and grow.
We work side-by-side with our founders, from
writing sales content to making cold calls and
negotiating contracts.
EV: On that note, could you briefly describe
Blueprint Health?
MF: Blueprint Health invests in early stage
healthcare technology companies. For the first
three months of our investment, our portfolio
companies relocate to our office where we
provide them with access to capital, clients and,
most critically, a community of 180 mentors that
have startup, operational and financial
healthcare experience. Our approach is modeled
after TechStars, a mentorship-driven accelerator
program. To date, weve invested in 60 health

May 2015

EVALUATION

tech companies, 85% of which are generating

revenue.
EV: The Accelerator model is very interesting.
In exchange for a modest ($20,000)
investment, and the support of your mentor
network
and
alumni
community,
entrepreneurs give you a 6% equity stake in
their company. What are the merits of the
model in terms of generating venture style
returns?
MF: The capital is the least attractive element of
what Blueprint provides. We offer companies
incredibly unique access to prospective
customers and investors and a growing
community of peers that they can lean on. We

Page 25

proposition. And, as youd expect with selling to

large players, once youve got a foothold, the
revenue tends to be sticky.
We have several companies that will generate
over $1 million in ARR this year.
EV: The screening process around deciding
which applicants to accept into the
accelerator must be very difficult. Do you
employ any valuation methodologies in this
process to gauge the value of your equity
stake?
MF: We dont apply valuation methodologies.
Our companies are too early stage for any
financial forecasts to hold any weight. As they

As they say with startups - the only thing known with certainty in forecasting a
startup's business is that those forecasts will be wrong.
continue to provide support to the companies
long after the initial twelve weeks. Our interests
are aligned; the better resources and client
access we can provide to our companies, the
more our companies will progress. Ultimately,
the growth of our companies will make them an
attractive acquisition and well be able to meet
or exceed our performance targets.
Our position in the marketplace allows us to
source deal flow at attractive valuations. Because
of this, the performance of our funds has been
very strong.
EV: Could you speak briefly about some of the
major success stories out of Blueprint?
Where are these companies now?
MF: We track several metrics about our portfolio
companies, but the primary indicator we look at
is revenue. Our portfolio is almost entirely
enterprise startup and as I mentioned, 85% of
our portfolio is generating revenue. Enterprise
sales can be a slog, but getting paying clients
means that someone is validating your value

say with startups, the only thing known with

certainty in forecasting a startup's business is
that those forecasts will be wrong. That said,
what matters to us is our belief that an applicant
can tell a credible story about how to build a
sustainable business or put differently, how to
reach $500,000 in revenue. This entails
applicants being able to explain the problem they
are attempting to solve and for whom. Also, the
benefits of their solution, ideally articulated in
economic terms, and the ability to demonstrate
insight into their clients willingness to pay is
important. Our terms are fairly standard for an
accelerator and are based on TechStars original
model. Our intent is to be as founder-friendly as
possible, which if you ask our portfolio
companies, I believe is something weve
accomplished. In other words, our portfolio
companies believe Blueprint has been able to
deliver value in excess of what they had to give
up to become part of the Blueprint Health family.
EV: There are over 100 healthcare
accelerators worldwide, and a majority of
these are in the United States. Can you talk

May 2015

EVALUATION

about shifts in the competitive landscape that

have emerged over the last five years? Is it
becoming increasingly difficult to attract the
best ideas?
MF: Indeed, there has been a real proliferation in
healthcare accelerators over the past few years. I
do think it makes sense that industry-focused
accelerators exist and opportunities in health
tech are abundant. But healthcare is a very
challenging area to start a company. It requires
an understanding of how organizations,
processes, and incentives operate in the
healthcare arena. Thats the primary reason that
our sole focus is to bring together experts who

Page 26

120 founders and help them accomplish their

goals. The lifeblood of any early-stage company
is sales. That can mean convincing a consumer to
use your product or service, or getting a large
enterprise to cut a six-figure check. My
background is in sales and business
development, so I use my experience to help
companies create a benefits-based sales
approach, craft sales content, and establish a
sales process.
EV: You also started something called
Blueprint Summit, and are involved in a nonprofit called Venture for America. Can you
tell us more about these?

Starting a company has its fair share of ups and downs; in many cases, the
struggles enable the successes.
know how to build healthcare companies
(healthcare entrepreneurs), sell in to healthcare
organizations (industry executives) and finance
the growth of health tech companies (investors).
There is a high bar for accelerators to hit in
order to deliver value to their companies above
and beyond the equity they take. Its unclear to
me that the vast majority of healthcare
accelerators achieve this. For that reason, we feel
confident in our ability to continue to attract the
best founders.
EV: One of our interviewees mentioned that
the single most useful background for being
in the venture business is having had the
experience of starting a company. Clearly
youve displayed some entrepreneurial spirit
along your career path so far. What is the
most rewarding part of starting your own
business? How do you leverage your
background to help other entrepreneurs find
their stride?
MF: Starting a company has its fair share of ups
and downs; in many cases, the struggles enable
the successes. At Blueprint, its been
tremendously rewarding to work alongside our

MF: I actually started Blueprint Summit while I

was at UBS. Blueprint Summit preceded
Blueprint Health and despite the name, they
have nothing to do with each other aside from
my involvement. I have always had an interest in
giving back, and as I progressed in my
professional career, I spent more time thinking
about the intersection of business and
philanthropy. Selfishly, I wanted to learn from
those who made a substantial positive impact
both in their professional and charitable
endeavors. I started Blueprint Summit, a
quarterly roundtable series, to explore that very
topic.
Venture for America (VFA) is a nonprofit that is
modeled after Teach for America and places
high-performing college grads at startups in
cities primed for revitalization. This fall, VFA will
have over 200 fellows working in the trenches of
startups in 16 cities including Detroit, New
Orleans, Pittsburgh, Providence and San Antonio.
The goals are to help create 100,000 new U.S.
jobs and train the next generation of
entrepreneurs.

May 2015

EVALUATION

EV: What advice do you have for current

students looking to get into venture capital?
What is something that you know now but
didnt as a student?
MF: The startup community in NYC is relatively
small and there is no shortage of access points.
There are plenty of events, classes, or online
resources that can provide entre to the growing
startup ecosystem. And its probably a safe
assumption that a friend, or a friend-of-a-friend,
works at a startup, so apply your networking
skills and expand the number of conversations
you are having. Its important to become an
active participant in the startup community.
When you are in front of your computer, head
over to the portfolio pages of seed funds and
venture firms and familiarize yourself with the
type of companies that have raised capital in
NYC. Perhaps youll find a few that pique your
interest. Many investors have operational
experience at startups, which can be a good place
to start.
EV: Thanks for taking the time, Mathew, we
really appreciate it.

Page 27

May 2015

EVALUATION

Page 28

SIMR Recent Events (Spring 2015)

Students attend the 50th Annual Berkshire
Hathaway shareholders meeting in Omaha

Pictured from left: Yang Lu, Kota Isogai, Troy Green, Abhi
Sanghi, Sid Agarwal, Billy Duberstein, Vinny Nyamathi, Dan
Reagan, Bryce Webster, Sid Dandekar, Ethan Ellison, Jerry
Jiang, Owens Huang

Michael Mauboussin speaking at

the annual SIMR Conference

Fireside Chat with Larry Summers

Pictured from left: SIMR President Josh Bronstein,

Professor Charlie Murphy, former U.S. Secretary of
the Treasury Lawrence Summers

SIMR Board after the annual Conference

2nd Annual

Stern
Investment Idea
Contest
Thursday, April 16, 2015

The best public security ideas from the NYU Stern

community.
Thank you to our judges, alumni, guests and fellow
students for participating!
We hope to see you again in Spring 2016.

Results from the 2nd Annual Stern Investment Idea Contest

The 2nd Annual Stern Investment Idea Contest was held on Thursday, April 16, 2015 to select the best
original investment idea from among Stern MBAs.
A brief summary of the ideas is included below, and the top-3 ideas are enclosed in the pages that follow.
Please feel free to reach out to the contestants or the club if you would like to learn more.
The contests nearly 20 entries were winnowed down to 7-finalists who presented original long and short
investment ideas. As a reminder, last years pitches earned an average return of 50% in 12-months (19%
stocks-only) versus the S&P return of 15%.
We would like to thank this years Stern-alumni judges: Matthew Lipton (MBA 2010, Neuberger
Berman), Emily Smith (MBA 2009, American Century) Dave Umbro (MBA 2012, Voya), Eric
Woodworth (MBA 2001, DSM Capital) and Eric Wu (MBA 2011, Incandescent Capital).
We also thank our special guest judge Win Murray, Portfolio Manager and Director of US Research for
Oakmark Funds. Finally, thank you to our many Stern alumni, guests, and students for participating in the
contest and happy hour.
The top three finishers were:

First place: Katherine Shinkareva (MBA 2016), who pitched Masco Corporation (MAS, $27 per share), a
building products producer, with a target price of $32 per share (22% upside). She made a strong case for
momentum in the repair and remodeling industry, an improvement in capital allocation owing to a new
CEO and activist involvement, and a margin expansion from cost cutting and declines in input costs.

Second place: Owens Huang (MBA 2015), who pitched shorting Youku Tudou Inc. (YOKU, $16 per share),
a Chinese internet television company, with a price target of $10 per share (39% downside). He made a
compelling case that Youku is losing growth momentum and market share, it is operating in a capitalintensive commodity industry with low margins and low loyalty, and the company faces a recent SEC
probe and lawsuit.

Third Place: Jerry Jiang (MBA 2016), who pitched shorting Car Inc. (0699 HK, $17 per share), Chinas
largest car rental company, with a target price of $5 per share (70% downside). Jerry made a strong case
that Car Inc. uses aggressive accounting that inflates profit margins, its new franchisee model creates offbalance sheet credit risks, and its 37-times earnings multiple does not account for low barriers to entry
and the potential for industry disruption.

The remaining finalists were:

Billy Duberstein (MBA 2016), who pitched Ubiquiti Networks, Inc. (UBNT, $29 per share), a wireless
products company, with a price target of $41 per share (40% upside). He argued that the company will
further penetrate the enterprise market, will grow in emerging markets through a new product
introduction, has new partnerships with major carriers in China and India, and has an exceptional owneroperator with a long-term vision for the company.

Ethan Ellison (MBA 2016), who pitched Iconix Brand Group Inc. (ICON, $33 per share), a brand
management company, with a target price of $45 (30% upside). He argued that Iconix offers an attractive
asset-light business model, a catalyst in the form of the new Peanuts movie coming out in 2015, a strong
CEO with an eye for acquiring attractive brands, and an overreaction to a recently published short thesis
and lawsuit.

Jeff Nathan (MBA 2015), who pitched Bellatrix Exploration Ltd. (BXE, $3 per share), a Canadian oil & gas
exploration and production company, with a price target of $10 per share (200% upside). He argued that
oil prices will eventually rebound from $50 as oil has a steep supply/demand curve and US shale drilling
has a higher production ramp and steeper decline curve than conventional production. He also argued
that the management team has an underrated ability to allocate capital, a downside analysis shows the
company passes its liquidity and coverage requirements through 2017, and the stock trades at an
opportunistically low valuation.

Vinny Nyamathi (MBA 2015), who pitched shorting Fortescue Metals Group (FMG AU, $2 per share), an
Australian iron ore producer, with a target price of $0.85 (56% downside). He argued that the iron ore
industry is poised for further deterioration, the company is at a cost disadvantage relative to competitors,
the company faces high debt levels and negative free cash flow, the company had issues with their recent
attempts to refinance their debts, and the LTM multiple is misleading investors into thinking the stock is
cheap.
We are very proud of this years contestants and participants. Research at Stern is thriving. Please get in
touch with us to attend or participate next year. We hope to see you in Spring 2016!
Sincerely,
Stern Investment Management and Research Club
Contributed by Jeff Nathan
Jeff is a second year MBA student at NYU Stern. Jeff worked at T. Rowe Price during the
summer and plans to return there after graduation. Prior to Stern, he was a Vice
President at Atlas Holdings LLC, a private equity firm. He holds a BA from Washington
University in St. Louis. Jeff can be reach at [email protected].

Jeff Nathan

2nd Annual

Stern Investment Idea Contest

MBA Finalists Owens Huang, Jerry Jiang, Vinny Nyamathi, Bryce Webster, Ethan Ellison, Katherine Shinkareva,
Billy Duberstein, and Jeff Nathan

New York University Stern School of Business

April 16, 2015

May 2015

EVALUATION

Page 33

First Place Winner Stern Investment Idea Competition

Katherine is a first-year student at NYU Stern specializing in Finance and Strategy.
She holds a B.B.A. in Finance and Business Economics from Pace University. Prior to
Stern, Katherine worked in investment banking at UBS and credit analysis at
Moodys. Her industry focus has spanned financial, industrial and government
sectors. Katherine can be reached at [email protected].

Katherine Shinkareva

Industry
Recommendation
1yr Target / Total Upside

Building Products
BUY
$32.00 / 20%

Buy Masco (MAS) for 20% Upside Based on a Sum-of-the-Parts Valuation

Masco Corporation manufactures, distributes and installs home improvement and building products. Its the
company behind brands such as Behr paint, Delta faucets and KraftMaid cabinets. Masco distributes products
through multiple channels; retailers Home Depot and Lowes accounted for 37% of 2014 sales. Operations in North
America generated 81% of sales.

Investment Thesis

Ticker
MAS
Momentum and growth in repair and remodeling industry:
Price ($)
$26.51
Following the spinoff of its insulation business, MAS will be a pure
Date of Price
15-Apr-15
play on the remodeling industry. Strong enthusiasm for this sector
is warranted. The median age of housing stock is almost double
52-Week Range ($)
$19.50 - $27.40
what it had been in the 1980s. Although there is an ongoing need
Market Cap ($ mm)
9,172
for maintenance, spending sharply retreated during the economic
Diluted Shares O/S
downturn. However, that pent-up demand is materializing now
349
(mm)
discretionary remodeling spending is increasing for the first time
Float %
98.9%
since 2005. There is also a shift towards higher cost items and
larger scale renovation projects, fueled by positive developments in
Shares Sold Short (mm)
12.2 / 4.0
the broader economy (job growth acceleration, consumer
/ Days to Cover
confidence increase and home equity appreciation). The industry is
TTM P/E
11.05
on the cusp of significant and sustainable growth. Repair and
remodeling spending peaked in 2007 at $324 billion, but is
Forward P/E
21.27
projected to surpass this number in 2015. MAS is well positioned to
TTM EV/EBITDA
11.14
capitalize on the growth. As a leader in its segments, it can leverage
its brand equity to win market share and charge higher prices. For
Forward EV/EBITDA
10.01
example in 2014, MAS realized margins of 15% in its
Dividend ($) / Yield (%)
$0.36 / 1.37%
plumbing/faucet segment compared to the industry average of 8%.
source: Capital IQ, Nasdaq
Similarly, the paint segment generated 18% margins compared to
the industrys 11%. This dynamic of industry growth and leading market share will propel MAS stock forward
in the coming years. (source: Joint Center for Housing Studies of Harvard University, Department of Housing and
Urban Development, Company Filings)
Balanced approach to capital allocation through share buybacks, strategic M&A and deleveraging: MAS
has historically been a financially conservative company with robust cash flow generation. In 2014, cash and
short-term investments on hand and revolver availability totaled approximately $3 billion. This financial
profile attracted the attention of activist investor Dan Loeb, who lobbied for capital return to shareholders.
MAS began a multi-year share repurchase program, buying back 5 million shares in 2014 and allocating $400 $500 for buybacks in 2015. MAS also raised its dividend by 20% to $0.09 quarterly. The company can

May 2015

EVALUATION

Page 34

continue returning cash to shareholders. In 2014, the dividend payout ratio was 14% (24% with buybacks)
compared to a historical average of approximately 50% while competitor payouts have been in the 30-70%
range. For 2015, the total payout ratio will be 60% - 70%. MAS is also refining its approach to M&A and its
debt profile. Historically MAS focused mainly on organic growth, but new CEO Keith Allman identified
strategic M&A in the plumbing and paint segments as an important initiative. MAS is also deleveraging,
pledging to reduce debt by $300-$500 million. 2015 leverage targets are Debt / EBITDA of 2.5 3.0x and FFO
/ Debt of 25 30%.

Margin expansion from cost cutting initiatives and declines in input costs: MAS is pursuing a leaner
operating model initiatives include technology upgrades, plant closures and layoffs. Similarly, deflation in
raw material (titanium dioxide, copper and zinc) costs will boost operating margins over the short-term.
These cost control measures will help offset foreign exchange headwinds and challenges in the cabinets
business, which has been plagued by pricing and delivery issues for years.

Valuation
Current multiples are in line with the peer group, but MAS should trade at the higher end of the historical range for
building product companies (8 12x EV / EBITDA) given strong competitive position and growth prospects. MAS
trades at a discount on a forward basis despite strong operating metrics.
Installation
8%
6%
7.5
10%
8%
8.0
7%
6%
6.5

Paint
4%
20%
12.5
4%
23%
13.0
3%
15%
11.0

Other
10%
8%
7.5
10%
8%
7.5
10%
8%
7.5

Total
5%
12%
11.3
6%
13%
11.7
5%
10%
9.5

Company
Fortune Brands (FBHS)
American Woodmark (AMWD)
Norcraft (NCFT)
Average

Forward Multiples
P/ E
EV / EBITDA
22.7
13.0
22.5
9.3
21.4
11.9
22.2
11.4

ROE
9.5%
10.8%
10.2%

3-year Averages
ROA
5.1%
6.0%
6.1%
5.7%

ROC
7.2%
9.7%
7.7%
8.2%

Installation
Products

Installed Building Products (IBP)

Builders FirstSource (BLDR)
Stock Building Supply (STCK)
Average

22.9
23.3
22.8
23.0

11.0
13.5
18.2
14.2

19.4%
-35.0%
-4.4%
-6.7%

2.5%
3.5%
0.7%
2.2%

7.0%
4.9%
1.2%
4.4%

Decorative
Paint

Sherwin Williams (SHW)

PPG Industires (PPG)
Valspar Corp (VAL)
Average

25.8
19.7
17.9
21.1

16.0
12.4
11.3
13.2

45.2%
22.0%
27.0%
31.4%

10.8%
6.7%
9.0%
8.8%

21.7%
12.9%
13.9%
16.2%

Other

Ply Gem (PGEM)

Masonite (DOOR)
PGT (PGTI)
Average

17.9
45.0
18.8
27.2

11.3
13.1
15.6
13.3

-2.3%
29.6%
13.7%

4.2%
0.6%
9.0%
4.6%

5.7%
0.8%
11.1%
5.9%

Masco Corporation (MAS)

17.9

11.3

47.7%

6.1%

9.9%

Base

Bull

Bear

Segment
Cabinets /
Plumbing

Revenue growth
EBIT margin
EV / EBITDA
Revenue growth
EBIT margin
EV / EBITDA
Revenue growth
EBIT margin
EV / EBITDA

Cabinets
2%
1%
8.0
3%
1%
8.5
1%
1%
7.5

Plumbing
5%
16%
12.0
5%
17%
12.5
4%
15%
10.0

$mm
Adj. EBITDA
Implied EV / EBITDA
Enterprise Value
Net Debt
Pension Liability
Equity Value
SOTP Discount 10%
Shares O / S (mm)
Price Target
Upside / Downside %

$
$
$
$
$

Base
1,310
11.28
14,128
(1,487)
(488)
12,153
0.9
349
$31.38
18.4%

$
$
$
$
$

Bull
1,422
11.75
15,887
(1,487)
(488)
13,912
0.9
349
$35.92
35.5%

source: Capital IQ

Considerations
Foreign exchange rates: MAS earns 20% of revenue internationally. A strong US dollar could also
introduce new foreign competitors although brand equity will mitigate some of the risk.
High Consumer Concentration: MAS has had good relationships with Home Depot and Lowes, it could
experience pricing pressures from them.
Demographics: Millennials have been slow to form households. The shift towards multi-family housing
reduces volumes. Housing starts indicate this trend may be reversing, but the American Institute of
Architects continues to focus on multi-family design.

Bear
$ 1,139
9.67
$ 10,677
$ (1,487)
$ (488)
$ 8,702
0.9
349
$22.47
-15.3%

May 2015

EVALUATION

Page 35

Second Place Winner Stern Investment Idea Competition

Owens received his B.Sc. in Chemistry from National Taiwan University in 2006. Prior
to attending Stern, Owens worked as an investment commissioner at Taiwan
Insurance Guaranty Fund, managing the $10 billion portfolio of an insolvent life
insurance company. While at Stern, Owens has won the Fortress Challenge, a national
portfolio management competition sponsored by Fortress Investment Group. Overall,
he generated alpha of 40% and Risk Adjusted Alpha of 2% in a one year period with a
diversified
long-short
equity
portfolio. Owens
can
be
reached
at [email protected].
Owens Huang

40% Downside. YouKu cant Generate Profit

Ticker:
Current Price($) 4/17/15:
Price Target($):
Short Return(%):

(YOKU)
16.8
10
40%

1. Losing growth momentum and market share with increasing competition from Baidu and Tencent.
YouKu posted revenue growth of 33% in FY14, significantly lower than its key competitors (Baidu: IQiyi+PPS
+108% YoY; Tencent video +167% YoY; Sohu video +62% YoY). YouKu faces fierce competition, and the
market share of revenue dropped substantially to 17% in 2014, compared to 22% in 2013. The revenue gap
between YouKu and Baidu has been narrowing quickly. IQiyi and PPS, owned by Baidu, have around the same
numbers of browsing hours and achieved market share of 12%. This shows that either YouKu charges more
expensive advertising fee or YouKu puts too many Ads on its website or in the video streaming. Both reasons
explain the slower revenue growth. The game is changed since clients now know IQiyi has the same size user
base. IQiyi is depressing YouKus revenue momentum.
2. China online TV is a capital-intense commodity business with low margin and low loyalty. The market is
fragmented and competitive: Internet giants like Baidu and Tencent are pouring money to invest in video
content and mobile presence. Baidu (IQiyi+PPS) announced they spent RMB 1.8bn for content cost in 2014,
increased 125% from 2013. In Baidu conference, they said Baidu would increase the spending with same path
in 2015, implying above RMB 3bn 2015. YouKu also spent RMB 1.8bn in 2014, but if YouKu didnt increase the
spending, they would loss viewers and advertising clients. But even when they spend, the contents are mostly
the same, and customers have no loyalty. Another concern is the bandwidth cost while migrating video
resolution from SD to HD and Ultra HD. Its difficult to cut the cost, because most bandwidth is controlled by
State-owned enterprises. This explains why YouKu cannot generate profit.
3. SEC probe and lawsuit of accounting fraud ruin the companys reputation. On March 26, many law firms
allege that YouKu made false and misleading statements about its revenue, failed to properly record nonmonetary transactions, and lacked "internal controls over financial reporting." As a result, YouKu's financial
statements were false and misleading. YouKu postpone its annual report till the end of April.
4. When will YouKu generate profit? Sell-side analysts will continue to downgrade their forecasts. Several
sell side analysts recommend Buy by evaluating YouKu through DCF, but all the models show no positive
profit before 2019. The DCF assumption is unreliable. In the past calls, YouKu has always announced
disappointed result, and sell-side analysis downgraded the target price. It is impossible to turn around this
terrible situation. Additionally, YouKu finished USD 300m buyback with average price of $18.6 in 2014, now
15% loss. The CFO, Mr. Ge Xu, resigned last November.

May 2015

EVALUATION

Company Information:
YouKu Tudou Inc. is an Internet television company.
The Company's Internet television platform enables
consumers to search, view and share video content
quickly and easily across multiple devices in the
People's Republic of China. YouKu now generates
87% of revenue from Advertising and 12% from
Subscription.
Near-Term Catalysts for Short:
(1) SEC probe and lawsuit of accounting fraud
(2) Regulatory risks in Chinas media industry
(3) Litigation based on allegations of copyright
infringement

Page 36

Profitability
ROA
ROE
ROCE
Gross Margin
OP Margin
Net Margin

2012

2013

2014

-3.9%
-4.5%
-6.6%
25.4%
-25.6%
-23.6%

-5.5%
-6.5%
-7.2%
17.9%
-22.4%
-19.2%

-5.2%
-6.3%
-8.3%
19.4%
-22.8%
-22.0%

The Key Risks for Short:

(1) Competitors or Alibaba M&A
(2) Content cost drops significantly
(3) Competitors go out of business

Valuation: The one-year target price is $10, implying a 40% potential downside. I used 1.4x tangible BV of 2014,
equal to the BV of 2015.
DCF: Zero. Losing growth momentum, YouKu wont generate profit or free cash flow at least till 2019. The sellsides DCF assumption after 2019 is too uncertain.
Tangible Book Value: $7.
M&A Value: Alibaba has 20% of shares; Baidu and Tencent wont acquire YouKu. Alibaba wont provide
additional capital in the near term.
Peer Comparison: YouKu is the only public stock that operates 100% business in online TV in China. Its unfair
to compare its valuation to Baidu, Tencent and Sohu.
Profile:
Market Capitalization ($,mm)
Share Outstanding ($,mm)
Beta
52-Week Price Range ($)
Avg. 3M Daily Vol. (mm)

3,240
193.3
2.9
26.9/11.9
2.0

EPS and Forecast:

2013
(3.5)

2014
(4.7)

2015e
(5.8)

2016e
(6.9)

Top 5 Public Ownership:

Shareholders
Ali YK Investment
1 Verge Holding
Platinum
Janus
Morgan Stanley

% of Total Shares
Outstanding

20.3%
18.0%
6.3%
4.1%
3.7%

May 2015

EVALUATION

Page 37

Third Place Winner Stern Investment Idea Competition

Jerry is a first year MBA student at the NYU Stern School of Business. Prior to Stern,
Jerry worked for Korea Investment Management as an assistant portfolio manager,
covering Greater China and Southeast Asia equities. He also worked as a
quantitative strategy analyst at Daiwa Securities and analyst at Bank of America
Merrill Lynch. Jerry received his B.B.A in Finance and Economics from Hong Kong
University of Science and Technology in 2009. Jerry can be reached at
[email protected].
Jerry Jiang

Car Inc. (HKSE: 0699 HK):

Date of Report
Current Price
Target Price
52-Week Range
FY 2014A EPS (Adj.)
FY 2015E EPS (Adj.)
FY 2014A P/E
FY 2015E P/E

4/10/2015
HK$17.4
HK$5.1
HK$18 / 9.88
RMB 0.27
RMB 0.38
49.6x
36.6x

STRONG SELL

Shares Outstanding (MM)

Institutional Holdings (%)
Beta
FY 2014 Sales (MM)
FY 2014 Net Income (MM)
Dividend Yield
Market Cap. (MM)
Debt/Equity Ratio

2,358
53
0.911
RMB 3,520
RMB 436
Nil
HKD 41,236
64%

Investment Summary
Inflated margins on both aggressive accounting for depreciation and abnormally low direct operating expense
led to 20% net margin vs. Hertz/AVIS 2-5% net margin.
The newly introduced franchisee model may put the company into serious credit risk.
Given the asset-heavy and low entry barrier nature, current 36.6x 2015PE is not justified. My target price of
HKD 5.1 is based on 18x 2020EPS and cost of equity of 8%. With 70% downside, I suggest STRONG SELL.
Business Description
Founded in 2007 and IPOed in September 2014, CAR Inc. (CAR) is Chinas largest car rental company, followed by
eHi (EHIC US). Currently, CAR has a total fleet size of 63,522 vehicles, which is greater than the aggregate size of
the top 2-10 players. CAR has a dominant short-term car rental market share of 31%. In 2014, rental revenue and
sales of used cars accounted for 81% and 19% of total revenue, respectively.
Investment Thesis
Reported profitability violates basic law of economics. CAR originally filed an S1 to the SEC in early 2012.
Due to loss making and unfavorable valuation, CAR gave up its first IPO attempt on the NYSE. However, in its
second attempt to IPO in Hong Kong, it achieved a splendid operating turnaround within just one quarter (from
2013Q4 to 2014Q1). Car rental operating margin significantly improved from 4% in 2013 to 30% in 2014.
Comparable net profit margin also hiked from -7% in 2013 to 20% in 2014. This is much higher than AVIS
2.9%, Hertzs 3.2% and Brazils leader, Localizas 10%. Given the traditional asset-heavy business model and
low entry barrier nature of car rental industry, I think 20% net profit margin is hardly achievable. For car rental
companies, depreciation and direct operating expenses are the major cost contributors.

May 2015

EVALUATION

Page 38

Questionable depreciation. According to the company, CAR is able to dispose most rental vehicles at 65% of
purchase price after 30-36 months. This implies a monthly depreciation rate of 1.16%, which is materially lower
than N. American rental companies 1.67%. Compared to N.A. players, CAR may be under-depreciating its fleet.
The sudden turnaround in 2014 was largely attributed to the significant improvement of deprecation as % of
rental revenue. The ratio improved from 31.3% in 2013 to 23.4% in 2014. I believe the improvement is mostly
attributed to the introduction of franchisees since 2013 December. As of 2014H1, CAR has 717 directly operated
service locations in 70 cities and 202 franchised service locations in 162 small cities. Before 2014, CAR disposed
its used cars only through third party dealers. But in 2014, 1/3 of the disposed cars were sold to its own
franchisees. I find that the net carrying value for used vehicles disposed through leasing to franchisees (76% of
purchase price) is significantly higher than the average disposed value of 65% of purchase price.
Unusually low direct operating expense (DOE) as % of rental revenue. Direct operating expenses are
comprised of payroll costs, store expenses, insurance fees, repair and maintenance fees and fuel expenses. CARs
sudden financially turnaround is also attributed to the improvement of DOE as % of rental revenue from 39% in
2013 to 34.5% in 2014, compared to global peers 51%-56% and eHis >50%. However, we do not see better
operating efficiency regarding fulltime headcount per vehicle (Total headcount per car: CAR 0.12; AVIS 0.06;
Hertz 0.05).
Off balance sheet credit risks through subsidiary capital leasing firms. If above mentioned is correct, why
are the franchisees willing to purchase the used vehicles from CAR at above market price and swallow the losses
for CAR? This is because CAR provides favorable loan terms to franchisees. CAR provide 3 year non-warranty
loan with 30% down payment and 4% interest rate (current three year loan rate from big 4 commercial banks is
at least 6%) . At the end of Year 4, franchisees will be able to acquire CARs stock at a pre-determined PE ratio.
In 2014, CAR disposed 15,483 vehicles, among which 5,298 were disposed through leasing to franchisees. This
led to a total lease payment receivable of RMB 360Mn. Future P&L impacts will come from potential write-off
from trade receivables and interest loss from above loans.
Valuation
With rapid near term growth, CAR is trading at 53x and 30x 2015/16 EPS. However, due to the asset-heavy
business nature and CARs aggressive accounting treatment, current valuation should not be justified.
Target price HKD 5.1 (Current Price: HKD 17.4): I performed market sizing for Car until 2020. Chinas
disposable income will grow at CAGR of 7%, while car rental market size will grow at CAGR of 14%. Market share
of CAR will grow from current 8% to 17% by 2020 (Which is similar to AVIS market share in US). CARs revenue
and fleet size will grow 33% and 30% respectively. My target price of HKD5.1 is based on a net profit margin of 5%
(normal peer margin) to 2020 revenue, 2020 P/E of 18x (high-end of peers) and a generous cost of equity of 8%. In
order to support the fleet size growth, further equity/bond financing will be inevitable.
How is my view different from the market?
Revenue (RMB MM)
2015E
2016E
Concensus
5581
8171
My estimates
4459
6583
Difference
-20.1%
-19.4%

EPS (RMB)
2015E
0.48
0.38
-20.8%

2016E
0.81
0.60
-25.4%

Risks

Upside: Increased utilization due to the newly launched chauffeured services

Upside: Government vehicle use
Downside: competition from P2P can rental firms and price competition

May 2015

EVALUATION

Page 39

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Spring 2015 Editors
Bryce is a second year MBA student at NYU Stern. This past summer he interned at
Numina Capital Management, an event-driven hedge fund in NYC. As a generalist on the
investment team, he performed research and valuation analysis on companies across a
variety of industries. Prior to attending Stern, Bryce spent four years at Gramercy
Property Trust in real estate investments, both debt and equity. Prior to Gramercy, Bryce
worked in the real estate ratings group at Moody's Investors Service. Bryce received a B.S.
in Industrial and Labor Relations from Cornell University and is a CFA Charterholder.
Bryce Webster ([email protected])

Ethan is a first year MBA student at NYU Stern. This summer, Ethan will intern at Morgan
Stanley as an Equity Research Associate. Prior to Stern, Ethan was a decorated member
of the U.S. Air Force, where he served for six years. His most notable role was as a Satellite
Operations Analyst, in which he safeguarded multibillion-dollar satellite constellations,
while leading a five-member team in a top-secret security setting. Ethan earned his B.S. in
Business Administration from the University of Vermont, holds a M.S. in Financial Analysis
from the University of San Francisco, and is a CFA Level II Candidate.
Ethan Ellison ([email protected])

Siddharth is a first-year MBA student at NYU Stern. This summer, Sid will intern at UBS as
an Equity Research Associate. Prior to Stern, Sid was an emerging markets investment
banker, assisting large Indian corporates in raising debt capital. He has completed all
three levels of the CFA examination and also manages his familys investment portfolio
across equity, debt, real estate and other alternative asset classes. Sid has a M.S. in
Industrial Engineering from Purdue University and a Bachelors in Computer Science from
the University of Mumbai, India.
Siddharth Dandekar ([email protected])