How does Canva really stack up?

For a long time, the author has argued that a big scandal is brewing in the Venture Capital world. This is a direct result of the opinion leaders in Venture Capital not being subject to the rigorous questioning and analysis that other areas of investment management encounter. There is rarely any pushback from pundits to the Silicon Valley pseudo-libertarian babble. Successes are always celebrated while losses are often swept under the carpet and never critiqued.

Direct listings, for example, were unnecessary. There is nothing wrong with the traditional IPO process. Bill Gurley pursued them because he wanted retail to price his deals, not hard-nosed fund managers in Boston, who actually have a clue. He probably still remembers how tough it was pitching to them, given he was a lowly sell side analyst once upon a time.

He knows full well that institutional money might make abnormal returns pricing up IPOs in good markets, but they play a very important role in pricing deals in downturns, when retail participation disappears. They often sustain losses. But then again, it would seem he would say anything to make a dollar.

Equally, SPACs did nothing for society. They created little in the way of innovation. They merely created a larger fee pool for sponsors. Chamath, the self-proclaimed “Warren Buffet of SPACs,” has gone very quiet, suspiciously.

Venture Capital’s approach to a potential downturn also has made no sense. Venture Capital firms currently have lots of capital and they are supposed to be focused on secular growth trends. Why then are they, all of a sudden, macro traders? Hasn’t Sequoia proved that they’re not very good at timing market cycles already? They got bearish in March 2020. If they get 2022 wrong, that’s 2 for 2.

KKR, a private equity firm, is still trying to buy Telecom Italia. Why aren’t Venture Capital firms equally courageous? Do they not drink their cool aid? Do they not believe in their valuation frameworks? Didn’t Microsoft confirm that we are in the early innings of digitalization? Didn’t Amazon numbers suggest e-commerce is only going to grow? The author is not a big fan of Sam Bankman-Fried but at least he has conviction in the crypto ecosystem. And surely, if the Fed does thread the needle, 2022 might end up being a great vintage, no?

Perhaps, though, the area that deserves the most focus is the opaque process by which valuations are determined for high growth private companies. As with all OTC pricing, the process tends to involve a club-set of insiders, especially from Series A onwards, whose very existence depends on successively higher priced rounds. (Most Sydney VCs are highly geared to the success of Canva). That opens the process up to a lot of abuse. And because financials for private companies are not always audited the way they would be, if they were listed companies, there is much room to fudge the numbers.

Canva is undoubtedly one of Australia’s tech success stories and hopefully a precursor for what Australia might produce in the future. Its growth has been truly phenomenal. Revenue grew 100% a year by some accounts by March 2022 to a conveniently nice round number of USD$1 billion. According to the company, it has been profitable on an adjusted EBITDA basis since 2017.

Their product remains very timely. They started focusing on the customer solution from day one. Given Adobe’s decelerating growth rates, it seems that no one wants a photo, video and illustrator suite. People want to make content for social media. And Canva, and a company like Figma, fill that niche perfectly.

Recently Canva faced a similar fate that many tech companies have encountered around the world. Its valuation got marked down. The company is now worth US$25.6 billion compared to the recent mark of US$40 billion. What’s US$15 billion amongst friends? Didn’t the US$40 billion print always seem a bit suspect?

Canva has seemingly experienced extraordinary growth but even a valuation of US$25.6 billion makes it more valuable than REA and Wisetech in Australia. Obviously, their growth is much slower but both companies produce audited results that show they are very profitable. Doesn’t that count for something? And an investor can hit the bid if they want out.

Canva is also more valuable than marketplaces like Etsy, which has a US$14 billion valuation. Etsy has had its issues like a lot of marketplaces, but it is still producing a lot of cash. Canva is also not much cheaper than a listed company like Datadog in the US that has explosive growth and very solid profitability. Given that Datadog is liquid, does that make Datadog relatively cheap?

We have experienced a capital market bonanza in privates for the last 10–12 years but when you take into consideration liquidity and often cleaner cap tables (very few, if any, preference shares), the author believes most investors should still focus on the public markets. Most private stuff is actually a distraction. Yes, there is volatility as we have seen the last 6 months but on the whole, our public capital markets have served Western society reasonably well for the last 200 years.

Canva, by all accounts, seems to be a fast growing, well managed enterprise. That’s wonderful, if true. But the press should not just be cheerleaders. It should ask the difficult questions as it would, if the company was listed. Perhaps let an analyst at one of the Boston funds pick apart its financial accounts. Canva is a business and Melanie Perkins, one of the Co-Founders, is a CEO. Let’s grill her like we would any business leader. Her views on world hunger or the environment are not relevant. The halo attached to these companies and to the Venture Capital industry, in general, is not warranted.

Unfortunately, the author doesn’t expect any changes soon. The Venture Capital ecosystem is a niche one and it can be very profitable for participants. And the people in the financial press, who usually would ask the questions, don’t want to miss out on the parties and the endless stream of capital raise articles. A scandal might be needed to shake things up a bit. Or perhaps a Christopher Hitchens style investigative journalist needs to do an expose on the industry. Frank Sinatra’s son (unproven) did one on Hollywood. Can’t he do one on Silicon Valley? Let’s see what happens.

(https://discussthetape.substack.com/)

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Mateen Chaudhry

Mateen Chaudhry

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Searching for alpha by challenging common narratives in politics, economics and finance. https://discussthetape.substack.com/. @discussthetape