Buyer Beware: SharesPost Index Under Values LinkedIn By Billions

Earlier this month SharesPost announced SharesPost Index, the industry’s first value index for venture backed companies.  After watching their valuations over the last few weeks, I’m a little concerned.

In June 2009, TechCrunch wrote that SharesPost reported LinkedIn’s valuation at $1.4 billion, which was $400MM above LinkedIn’s July 2008 $1 billion valuation from their $53MM round they had raised from Bain Capital Ventures, Sequoia Capital, Greylock Partners and Bessemer Ventures.  Below is a video taken shortly after the $53MM round, interviewing the investors that participated in that round with their justifications for the $1 billion LinkedIn valuation.

What I find odd is that SharesPost pegs a current valuation of LinkedIn at practically the same valuation that they had nearly 10 months ago.  In the same June 2009 report by SharesPost, they put a valuation of $4-6 billion on Facebook, and today, SharesPost reports Facebook’s valuation at $11.96 billion.  At least they agree that Facebook has created shareholder value in the last 24 months, that’s hard to dispute.

To be fair, SharesPost’s valuations are weighted and based on four inputs, which are transactions, research, financing and post inputs on their exchange.  But that’s the premise of this post, I’m not certain their weighted system is working properly for determining accurate valuations to potential buyers on their secondary market exchange.  Their website explains the weighting system as:

The SharesPost Venture-Backed Private Company Index is a modified market capitalization weighted index—the maximum percentage value of the index any company represents is 25%. The index value inputs for each company are an average of the four data inputs broken out above. Where data is unavailable or out of date (i.e., more than 120 days old), that input is omitted from the calculation and only the remaining inputs are used. So for example, where a company has not recently closed a venture financing, only the recent transactions, current posts and research report estimates are used as inputs into the SharesPost Index Value formula. SharesPost updates the Index Values on a weekly basis.

Their research valuation for Facebook is only $5.7 billion, whereas we recently reported a $50 billion valuation on Facebook.  I’m not quite sure how they determined their $5.7 billion valuation on Facebook when recent private transactions have been above $17 billion.

According to SharesPost, they do not use data that is over 120 days old (which is why the transactions and/or financing input is missing for several companies on their Index.).  The “post input” appears to be based on the recent posts on their secondary exchange, which is clearly not indicative of the overall market, although it seems close.

While in theory a Secondary Market Index seems like a great idea to help buyers on the secondary market understand what they’re buying, but providing incomplete and insufficient data when determining valuations is unprofessional at best, and potentially very dangerous to these potential buyers on their exchange.

SharesPost does list a disclaimer on their website about the valuations within their Index (see below), but I would think that they would want to ensure the most accurate valuations to help create investor confidence in their services.

The SharesPost Venture-Backed Index and the individual Index Values are only a reference point and should neither be construed or relied upon as an estimate of valuation of any company or group of companies nor as investment advice.

That said, we disagree with the SharesPost LinkedIn valuation and will be publishing a full report and valuation on LinkedIn very soon.  But I think its safe to say that LinkedIn has created shareholder value since their $1 billion round in 2008, in fact the SharesPost valuation is off by billions of dollars… if they’ve undervalued a company by billions, could they overvalue companies by billions in the future?  Buyer beware.

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