Changes

*Jerry Engel (engel@haas.berkeley.edu), Faculty Director, Lester Center for Enterpreneurship Entrepreneurship and Innovation

Michael estimated that that SVB has 'valuations' data on 2600 early stage firms, with many firms having multiple valuations conducted over time. [http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A Internal Revenue Code 409A] requires that there be no discrepency discrepancy between an options value and the value of common stock, in part to prevent issue with backdating of options, and that valuations be conducted by a third-party at an arm's length from either the 'service recipient' (i.e. employee/executive/etc) and the 'service provider' (i.e. the firm). Thus firms may have approached SVB to provide them with valuations on the firms common stock potentially every time that there is an event, such as a stock option issue, which would require compliance. SVB has been collecting this data for approximately 4 years.

One core service that the bank offers to its clients is the management of their firm's capital tables. The CapMx database was estimated to have approximately 2000 users, and contains details on the capital structure of the firm including common stock outstanding, preferred stock outstanding, warrants and stock options, employee share option plans, and liquidation preferrencespreferences. The users of this data are both the firms themselves, and accounting/law firms that work for these firms. The tables are 'initialized by agents' and then accessed by the firms.

SVB takes data from the validated and cleaned development database and uploads this onto their online [http://www.birst.com/ Birst] based web-platform, to provide their benchmarking service. Companies accessing this data through the Birst interface are restricted the selecting aggregate benchmarking portfolios to compare their firm against. The interface allows them to construct portfolios on the basis of geography, industry, comparability in terms of financial ratios, and so forth, and reports the size of the comparing portfolio as either 5-30 firms, 31-100 firms, and so forth. Firms are restricted to seeing comparison portfolios composed of at least 5 firms. SVB is trying to advance this service into a CEO desktop tool, which will report things like [http://willprice.blogspot.com/2008/03/magic-number-for-saas-companies.html Josh James' Magic Number] - this requires fine grained data as well as uninterupted uninterrupted sequential financial statements, which is surely good news for researchers going forward.

You can fill out a [http://www.svb.com/Products-and-Services/SVB-Analytics/capmx-demo-equity-tracking/ form to view a demo] of the [http://www.eprosper.com/ online interface] into the CapMX data . This online interface provides users with access to their data, and allows the users to conduct a limited number (and range) of transactions on it. The database can accommodate data on the authorized capital of the firm, all transactions performed on this capital, individuals/entities associated with this capital and/or these transactions, and details on the firm itself. However, there is little to no incentive for the firms or representatives of the firms to fill out any data beyond that which is required to record and use the capital structure at a particular moment in time. The original capital structure of the firm is inputted by staff at SVB. There is an 'upload template' to guide the staff in this process, and data is sourced from the certificate of incorporation (or certificate of authorization for later issues). However, the input suffers from a number of issues:*There is free text input for the class of stock, so that COMMON, Common, COM, Common1, etc, are all possible ways of recording a Common Stock entry.*It is not possible to close out a series of stock *There is no standardization on the naming of series (SERIES A, etc), and in the case of recapitalizations or reorganizations it is possible to have two series named say SERIES A and SERIES 1.*Preferences may not reflect the most recent series*Preferences are often recorded as a static value (taken from the certificate)*Likewise, the conversion ratio is recorded as a number, rather than an formula (1:1 conversions are less problematic)*There may be issues with the recording of preference priorities, participation, and payment-in-kind clauses*It would be highly problematic to record capital structures for firms organized as LLCs or LPs (or anything other than a C-CORP or S-CORP). Records are updated in two ways:*At every financing round the bank updates the underlying capital structure*By conducting transactions on the underlying structure through the online interface the structure can be automatically updated. (Note that in order to conduct a transaction on the capital structure, the components of the capital structure relevant to the transaction must be up to date. Thus transactions can act to validate the underlying structure data.) '''A full history of every transaction ever conducted is maintained throughout the firm's lifetime.''' Firms may conduct transactions related to:*Stock*Options*Warrants*Convertible Promissory Notes (CPN)*SPN*Rollbacks Transactions might include:*Issuances*Redemptions*Cancellations*Exercisings*Repricings Firms may also examine issues for [http://taft.law.uc.edu/CCL/33ActRls/rule701.html Rule 701 Compliance], conduct (one-stage) anti-dilution analysis, conduct (one-stage) liquidation preference analysis, compute the firm's fair market value, and build a wide variety of reports on the capital structure or transactions conducted upon the capital structure. (Note that by "one-stage" I mean that the data can be taken from the system and a single hypothetical analysis can be performed, and that it is not possible to temporarily store the changed capital structure that would result from the hypothetical analysis in order to conduct further hypothetical analysis. This does limit the usefulness of the tool with regard to simulation of the capital structure over time, such as for an exit analysis. SVB have recognized this limitation and are considering potential improvements [EJE]). No permanent record is kept of the one-stage analyses, or the reports produced. The database contains 4032 firms records, of which 924 are 'blanks' which are created when people test or demo the system. There are additional firms named "X - In Conversion", "X - Expensing Only", and "X - Dissolved", (where X is string) that should be discarded. Thus there are a little under 3000 active firms on the system. Of these only 339 have completed some information on the firm beyond that which is required to maintain and use a record of the firm's capital structure. The database uses its own IDs (separate from the CIF IDs mentioned above), but the firm name's are recorded directly from the Articles of Incorporation and should be sufficient to fully identify the firms.  The database runs on an Oracle platform, but the actual structure of the data in the database was not discernable. The R&D group of SVB is responsible for the operation and maintenance of the underlying data. However, it seems very likely that a SQL script could pull all relevant data into a single flat file for analysis. ===The Valuations Data=== Providing valuations to clients is a major business task for SVB Analytics. Valuations of portfolio companies by funds are required to be done at an arm's length and to use 'fair market values', to comply with [http://www.fasb.org/summary/stsum157.shtml FAS 157], annually. Likewise, annual valuations are required for the firms themselves to comply with [http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A Internal Revenue Code 409A]. Valuations are also required whenever there is 'trigger event', such as the issuance of stock options. However, clearly not all clients of the bank (or all firms in the industry) use SVB's valuation services.  Valuations are done using templated Excel spreadsheets. The sheets have the following elements:*The header: States the firm's name, industry and other information*Financial Info:**Actual - Taken from past annual statements**Calculated - Ratios and other calculated variables**Forecast - Annual forecasts for the next 1-3 years (typically). These forecasts are certified as accurate by the CEO.*Capital Structure of the Firm (may be drawn from CapMx)*Public Comparables: Lists comparable publicly held firms. The CEO acknowledges the comparability.*Summary of Valuation: Details the methods tried and (in which blend) used. Gives the equity value and hence the price per share.*Valuation Methods: Details the calculations of the various valuation methods. Methods include:**CVM (Current Value Method), a.k.a. Multiples Analysis (uses M&A Comparables)**Net Present Value (NPV) of future discounted cash flows**Weighted Average Cost of Capital (WACC)**PWERM (Probability Weighted Expected Return Method)**OPM (Option Price Method) At present there are approximately 450 'valuations' in the database, where each valuation was converted from a spreadsheet into a series of entries in database tables. There are approximately another 1500 valuations in the pipeline waiting to be extracted from spreadsheets into the database. It is anticipated that this set will be complete in about 3 months [EJE]. The current valuations are mainly from late 2009 and early 2010. The pipeline contains all valuations performed since 2008. Again, the data input/conversion process relies on outsourcing to India. It is unclear what format the final database will be in, but a SQL compliance DB seems almost a certainty. ===A Relationship with SVB=== SVB accumulated this data for three reasons:#Helping their clients make better decisions (though I had enormous problems playing they are careful not to breach confidentiality requirements with the data) is a service business to them#To enhance internal decision making, particularly with regard to business risk lending, but also to establish best practices within the bank#To use it as a component of a brand building strategy SVB believe [EJE]that Haas could contribute the brand building strategy by producing (practitioner relevant) research that would be published in (trade) journals and/or presented at (trade) conferences. It seems possible that we could also contribute to the first two reasons directly. Specifically, PhD students, in the course of accessing and processing data for research, could provide recommendations for commercial applications of the data that are current unrecognized or unexploited. A request was made for examples of journals and conferences that SVB would find useful/relevant. It seems likely [EJE] that suitable journals/publications include:*Business Valuation Review*The Journal of Business Valuation *The Valuation Law Review*The Journal of Private Equity*Inc Magazine*The Wall Street Journal SVB currently envisage the following access protocol:#Haas researchers pitch research projects to SVB personnel#Projects are examined on a case by case basis#Researchers are given on-site data access under an employee style contract to conduct approved research. Going forward, we should contact Dan with questions regarding data points (I am happy to do this if further information is needed), and probably Michael for faculty-to-bank relationship questions.