How does Veligera Capital Fund choose companies to invest in?
How to choose a company for Pre-IPO investments so that investments grow multiple times and risks remain within reasonable limits? Oleg Kuzmin, the leading analyst at Veligera Capital, explains it in this article.
Preparing for an IPO is a long and expensive process that requires serious work of the company. On average, bringing the key parameters of a business, its financial statements to the requirements of the regulator takes from six months to 3 years from the moment the decision-making takes place.
The process of a company choosing in accordance with the fund’s risk profile can be conditionally divided into several stages. First, we evaluate the business, top management and co-founders of the project in retrospect, and if the leadership and the history of the candidate inspire confidence, we can build a forecast for going public.
The sources of information are publications of leading analytical agencies, reports in international media, company data, both open and received at the request of the fund. All facts are being carefully checked. Companies’ indicators are changing in the course of work, information becomes outdated, the situation on the market is also changeable – all this imposes serious restrictions on the analysis time and decision-making. In order to maintain a high turnover of assets for investors, the fund is constantly working on the selection of companies.
CHOOSING AN INDUSTRY
Veligera Capital focuses on companies offering listings on the New York Stock Exchange (NYSE) or on the Automated Quotation System of the National Association of Securities Dealers (NASDAQ).
We are interested in markets that are growing at a faster rate – by tens of percent per year. Such growth can be provided by the high-tech sector. Wherein, it is important that our investments are minimally affected by stock market fluctuations, so we choose industries that are based on fundamental processes. Veligera Capital Fund paid attention to the areas of online education, cultivated food, neo-banking, computer technology, entertainment, robotization of the business processes, and electric transport.
WHAT’S THE BEST HERE?
The task is to find the best company of the selected sectors, which is also with a relatively low valuation in the private market. This combination allows the company’s shares to grow in price quickly.
An industry leader can be recognized by the following characteristics:
- The company's revenue is growing at a faster rate of 100% or more per year.
- The business is easy to scale.
- The company's leadership is confirmed by leading analytical agencies, for example: Gartner, Forrester.
- The company's valuation crossed the threshold of $1 billion, but did not go beyond $5 billion.
- The project has a wide client base, which is growing constantly.
- Stable or growing cooperation with large clients.
- The company has existed for less than 10 years.
- The founding team, their experience and achievements give grounds to count on the success of the project.
When the fastest growing candidate is found, we analyze how his assessment corresponds to reality, keeping in mind that our goal is undervalued companies or companies that have received a fair assessment. Such projects have all chances to continue to grow at a faster pace.
We evaluate the following parameters:
- Dynamics of the company's investment rounds over time. The best example is one round per year with an increase in raised funds from round to round by at least 100%.
- The potential for revenue and capitalization growth before entering the stock exchange starts from 100% per annum.
- The ratio of a company's valuation to its revenue. It happens that fast-growing companies are valued too expensive - at 100 revenues or more. This option does not attract in terms of profitability, however, we take under consideration the average values for the market in the segment.
- The ratio of raised funds to capitalization. The understated price of the company relative to the amount of funds raised indicates a low valuation for some internal, hidden reasons. If the company is overpriced - it can signal about overvaluation and over-mortgaging of the future returns that cannot be 100% guaranteed.
- The amount of funds raised is more than $150 million, including the participation of large venture funds. This is a control parameter - the opinion of our analysts must be in tune with the position of market leaders.
LOOKING TO THE FUTURE
The task of this stage is to determine with a high degree of probability whether the company will go public in the next year and a half.
To determine it, analysts study the company’s development plans: what helps the business to continue its growth, what has the management done, is doing and will do for this; does the company plan to acquire, improve its product, enter other markets, partnerships and other events.
Аdditionally, it is important to pay attention to the probability that the absorption of the company by a larger player is likely according to industry statistics. Acquisitions are not included in the strategy of the Veligera Capital Fund because it carries additional risks.
To estimate how long a company may want to remain private we’re using the accumulated knowledge about the valuation at which companies usually go public in a particular market.
It may happen that companies operate in newly emerging markets. For example, there is no accumulated statistics on entering the stock exchange in the neobank sector. In that case we’re more attentive to the experience of leading private companies in the industry and rely on the aggregated experience of related sectors.
Of course, there are other signals that make it clear that the company is preparing to go public. To conduct an IPO, you need to attract a lot of specialists: lawyers, underwriters, auditors, accountants, marketers, financial and information specialists, as well as senior company executives and, in some cases, independent experts. As an example, the project team may hire senior executives with positive experience in preparing companies for an IPO and bringing them to the public market. Changes in high positions are usually reported by the press.
An obvious indicator of the imminent entry into the stock exchange is the announcement of the company’s management about the upcoming IPO. Our fund prefers to invest up to this point, since such public statements are usually immediately kicking up the price. The conditions for entering one step earlier are more favorable than those that an investor usually receives immediately before the listing.
It is important to remember that Pre-IPO investing is a high-risk instrument. There is always a chance that something will not go according to plan. A thorough analysis of candidate companies allows us to select those whose positive characteristics outweigh unpredictable risks, random negative events. By collecting a diversified portfolio of such companies, the investor reduces the possibility of funds freezing or general losses in the direction of venture investments.
Deals with carefully selected companies that are one step away from going public allow to minimize risks while maintaining high profit potential.