Valuation is an Art, Not a Science – Twitter Acquires Crashlytics

Yesterday was awesome!  I woke up to see my latest post had been featured on Josh Brown’s popular blog, The Reformed Broker, which was super cool and allowed me to receive some great feedback via Twitter!  Then, around 5 pm Eastern, Crashlytics announced it had been acquired by Twitter.  Crashlytics is particularly special to me because I interned for the company from March 2012 until this past August.  Before taking the job, I had set a goal and laid out a strategy to find a start-up to work for that had serious potential of making it big.  By doing so, I was able to act as my own venture capitalist and conduct my own due diligence in order to pick the right company to work for.  My journey and the strategy as a whole was documented in a prior blog post and is definitely worth the read.  As a result, after hearing the news yesterday, I was ecstatic for the entire team at Crashlytics.  When I first joined the team in March there were 6 employees working in a tiny, one-bedroom apartment.  By the time I went back to school in August, the company had grown to 12 employees and a freshly constructed office space of their own.  Since then, growth has continued to skyrocket and they haven’t looked back.  The entire team has done an incredible job working as hard as they can, and it has quickly paid off.

Ultimately, I feel very fortunate to have been granted the opportunity to work for such a great company at an incredible time in their corporate history.  I certainly wasn’t around from day 1, but it was awesome to be able to experience the effects on the company after raising $5M in venture backed financing and seeing them truly take off.  The spring/summer was definitely a great learning experience and wasn’t anything close to what I’ve been taught in business school.

What I find most interesting, however, is how the entire internship and M&A process has related to my interest in investment banking, finance, and portfolio management.  As you can see from my LinkedIn profile, I don’t have any direct investment banking experience, yet I’m still trying really hard to break into the industry after graduation.  I have quickly found that the ultimate catch-22 of the industry is that you can’t work in investment banking unless you have prior investment banking experience – which doesn’t always make sense to me.  We’re constantly berated in business school and I’ve been told by many experienced analysts that valuation is an art, not a science.  As a result, I’m amazed how undervalued operating experience is in financial industries that are so heavily dependent upon accurate valuations of other companies.  For example, in venture capital, operating experience is almost required as it’s one of the most important selling points for entrepreneurs.  Not only will the VC firm give you capital, but they will expertly guide and advise you given their former operating experience.  Shouldn’t that also apply to investment banking?  Wouldn’t clients be more willing to go to a specific investment bank because their bankers know the intricacies of the business, are well-connected/network with other companies in the sector, and are able to unlock hidden value that may not be directly found on the balance sheet?

This thought came to mind today because there have been several blog posts written questioning the motivation behind Twitter’s acquisition of Crashlytics.  As a mobile software company focused on reporting application crashes, what are the synergies Twitter is trying to create?  I can be almost certain that if Twitter hired run of the mill investment bankers to find them an acquisition target, they would never in a million years have thought of purchasing Crashlytics.  I have a very good feeling the incredible network of the Crashlytics’ founders, investors, and employees is what first shed some light on these possible synergies.  Wouldn’t you think, as a banking analyst, that knowing how powerful of a network a company had would greatly affect the value it could fetch when put up for sale?  Why aren’t these qualitative factors (and the knowledge required to formulate them) ever sought after when recruiting for investment banking positions?  Valuation is an art, not a science.

I truly believe, that having analysts at a firm that have legitimate operating experience in the software industry, would have better been able to value a business like Crashlytics.  In fact, I gave a presentation on the company in a venture capital class at Babson last May.  A friend of mine in the class who had worked for a top tier investment bank over the summer (and signed an offer to work full-time starting the next summer) raised her hand and stated that she didn’t see how Crashlytics could be around very long because the market was too small, there’s an incredible amount of mobile software out right now, and they don’t make any money.  From an outsider’s perspective, her response makes sense.  But the true value of the business is the vision of the founders, the network of the company, the culture of the firm, the work ethic of the employees – nothing that would ever show up on any financial statement or model.

I believe using a DCF, LBO, comparable companies, precedent transactions and all of the other models we’re taught in business school are a great first step and get analysts on the right track to finding a company’s true value.  However, it’s the truly qualitative factors – that people who’ve worked  inside the industry will be able to easily find out – that will really unlock synergies and fetch higher values.  For example, someone experienced in a given industry could tell you what types of management styles are prevalent amongst companies or by certain prominent founders.  Different management styles, personalities, and company culture could give great clues as to how a company will spend their cash, how they will decide to grow, and which companies they may mesh better with.  Of course, sector specific focuses by banks and analysts are able to see this value to a certain extent, but is operating experience really a liability to job candidates as opposed to valuation/banking experience?  Artists are taught to think outside of the box while financial modelers are trained as if they’re practicing a science.  Just something to think about…

Again, congratulations to the entire team at Crashlytics and their investors for their hard work and dedication.  They certainly deserve the outcome.  For everyone else, let this Twitter acquisition serve as a great example of ways companies and their bankers can think outside of the box to fetch value and synergies.

**I wish I had equity in the company!

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