Comment by jakozaur

4 days ago

It doesn't look like a typical round for raising capital for investments. Instead:

1. Liquidity: Early investors could sell to late-stage investors, since they are not IPO. Their previous round looked like that.

2. Markup: The previous investors can increase their valuation by doing a round again. It also provides a paper valuation for acquiring new companies. That combined with preferred stock (always get 1x back) might be appealing and make some investors more generous on valuation.

11 comments

jakozaur

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ygouzerh  4 days ago

So if I understand well, investors are not really investing for the company results, but more on the hope that people will continue to invest in the company?

In a kind of a ... ponzi pyramid?

  • jakozaur  4 days ago

    A Ponzi scheme is extreme, where the underlying asset is worthless.

    Databricks is a fast-growing company with ~$4B in annualised revenue and huge potential.

    Many rounds got some portion of the round for liquidity. Similarly, markup strategies are common and valid. For existing investors, it works because they have already done research on the company and believe in it, so they put their money where their mouth is. For the company, it may speed up their fundraising process.

    Though those strategies carry some risks.

  • Aurornis  3 days ago

    > So if I understand well, investors are not really investing for the company results

    I don't know where you got that idea. Investors are putting their money into this company because they like the results and believe it's a better investment that their alternatives.

    Any time you sell shares you generate some signal about what a company is worth. You can claim the company is worth a $100B all day long, but until you can sell a significant number of fractional shares of the company at that valuation it's just talk.

    > In a kind of a ... ponzi pyramid?

    A ponzi scheme or pyramid scheme implies that the company is lying about their results and books. Classic ponzi schemes might not have any real assets at all. The operators lie about the company and rely on incoming cash from new investors to pay out claims from past investors.

    There's no ponzi here unless you believe Databricks is completely falsifying their operations and results. If any of those investors took their shares to the secondary market there would be plenty of other investors interested in buying them because they represent shares in the real company.

  • braza  4 days ago

    Not a Ponzi, but definitely some markup and valuation engineering.

    Let’s say that Databricks has 100B valuation (just for the sake of simplicity).

    They do this round, and due to this markup they can do acquisitions via stock option exchange. For instance, let’s say that you’re Neon, and you as a founder wants some sort of exit.

    It’s preferable to get acquired for 1B with let’s say, 100Mi in cash and 900Mi in Databricks paper valuation shares; than to wait for a long process for an IPO.

    If the mothership company (Databricks) goes public, you have liquidation and a good payday, or in meanwhile you can sell secondaries at a discount.

  • Imustaskforhelp  3 days ago

    Man I am not kidding but atleast this company has some returns but yes to me also its definitely risky, but it still has some decent intrinsic value as compared to companies whose sole objective is to trade within (MNC's should be illegal)

    Also, maybe I just want to talk about it, but whenever I hear about ponzi pyramid, I think about cryptocoins like bitcoin and then remember about the people paying 2$ to buy 1$ worth of btc in american institutional markets.

    My rant about crypto is unwarranted but I want to still share it. Stablecoins are really really cool but any native coins/tokens are literally ponzi pyramids / scams.

devoutsalsa  3 days ago

I had no idea how preferred shares actually worked, so I went down a rabbit hole looking it up. That "always get 1x back" thing you mentioned is called a liquidation preference, which means preferred shareholders get their money back first before anyone else sees a dime.

Turns out there are different flavors too. "Non-participating" means preferred gets their original investment back, then common stock splits whatever's left. "Participating" means preferred gets their money back AND also gets to participate in splitting the leftovers with common shareholders. No wonder investors are willing to pay up for these late-stage rounds when they've got that safety net.

  • bradhe  3 days ago

    You should read Venture Deals! Great book by Brad Feld and Jason Mendelson that's really comprehensive in this.