Perhaps the most interesting story to emerge from the venture capital slowdown and stock market correction that began in late 2021 is the rejiggering of unicorn valuations.
Instacart and Stripe picked up new, lower 409a valuations. Klarna got repriced via an equity round, and other richly funded startups that raised last year are staring down the prospects of either flat or down rounds as 2022 continues.
And then there’s Discord, which raised $500 million last year at a massive $14.7 billion valuation, per PitchBook data. The chat-focused software company, which previously turned down an exit to Microsoft for around $10 billion, then saw its valuation fall, according to Fidelity calculations. (The U.S. investing house, which mostly focuses on publicly traded equities, owns some Discord stock in its Contrafund, giving us regular looks at how Fidelity values it.)
As Insider first reported, Fidelity recently cut its valuation for its Discord shares. Is that reduction fair? Today we’re digging into Discord’s price change per Fidelity numbers and what we know about its growth trajectory, and then we’ll close with a comparison of the public markets to the company’s changing worth.
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If Fidelity’s cut is fair, Discord will still retain decacorn status, membership in the somewhat rarified club of private companies worth $10 billion or more. But we may find that Discord is cheap at Fidelity’s new mark, or that it is expensive yet, which would bode ill for not just the well-known communications service favored by gamers, but for a host of other unicorns as well.
Into the data!
Discord
If we go back in time, we can see that Fidelity’s Contrafund valued its 15,500 shares in Discord at $8.535 million at the end of 2021. In its most recent report, from June 30, we see a different implied per-share valuation. Previously, Fidelity valued Discord at around $550.65 per share. Now, the company is applying a slimmer $5.791 million valuation to those shares, making them worth around $373.61 per share.
In percentage terms, it works out to a cut of around 32%. If we apply the price cut to Discord’s $14.7 billion valuation, we can imply that Fidelity is valuing the heavily backed startup at $9.97 billion, or $10 billion for the sake of round numbers. Now the question before us is simple: Does that new price make more sense than the old one?
What’s fair?
When dealing with private-market companies, we are forced to deal with partial accounting. Private companies are never as transparent as we would like with their performance metrics, and Discord is not an exception to the rule.
What do we know about its performance? Reporting indicates that Discord generated $45 million in revenues in 2019 and around $130 million in 2020. From there, the revenue record runs dry.
So let’s do some speculative math. If we presumed, for example, that Discord managed zero growth last year, we could stack the $130 million figure against the $14.7 billion valuation set in its last private round and the $10 billion price tag that it appears Fidelity now ascribes to the company. Those metrics generate revenue multiples of 113x and 77x, respectively.
But it is doubtful that Discord was able to raise so much money last year, at such a high price, off of zero growth. But how much did the company grow? Here’s a range of answers:
- Presuming 50% 2021 growth ($195 million), Discord’s revenue multiple at a $14.7 billion value falls to 75x and 51x at a $10 billion price tag.
- Presuming 100% 2021 growth ($260 million), Discord’s revenue multiple at a $14.7 billion value falls to 57x and 38x at a $10 billion price tag.
We’re getting closer to sanity regarding Fidelity’s newly calculated valuation of Discord when we consider the multiple generated by 100% revenue growth last year.
But since 2021, another half-year has gone by. Let’s say that Discord grew by, I don’t know, 33% in the first half of the year. What would that do to the company’s revenue multiples? The following:
- Presuming 50% 2021 growth and 33% H1 2022 growth (a resulting revenue run rate of $259 million, loosely), Discord’s revenue multiple at $14.7 billion comes to 57x and at $10 billion just 39x.
- Presuming 100% 2021 growth and 33% H1 2022 growth (a resulting revenue run rate of $346 million, loosely), Discord’s revenue multiple at $14.7 billion comes to 43x and at $10 billion just 29x.
At this juncture, we’re not getting a multiple in the single digits or even the low double digits. Discord at $10 billion, 100% growth in 2021 and 33% growth in the first half of this year is still worth nearly 30x its revenue. Does that make sense?
Not really. Looking at the companies that make up the Bessemer Cloud Index, the greatest annualized revenue multiple in the market today is Snowflake’s at 25.6x (enterprise value/annualized revenue). Discord would need to earn the strongest multiple out there to make its valuation make sense per our own math. It still looks expensive.
Yes, but…
We could be underestimating the company’s growth. If it grew 100% in 2021 and, say, 50% in the first half of 2022, then the company’s revenue run rate could be around $390 million, which at a $10 billion valuation works out to a multiple of around 26x. That’s getting there.
And yes, Discord could simply keep on growing this year after raising so much money last year, eventually bringing its revenue multiple down from the stratosphere. But our headline asked if Discord is really worth 32% less than it was a year ago. Yeah, it probably is — if not more.
But that’s no Discord diss — the top quartile of cloud companies saw their revenue multiples fall from as high as 29x last year to around 10x today, per the Bessemer index. The whole market repriced. Discord just raised at the market peak, meaning that its late-2021 valuation will take some hearty translation work to make sense in the new climate. And by “translation work,” we mean continued, strong revenue growth.
Does any of this mean that Discord should have taken the Microsoft money? Nope. But it does make the price that Microsoft was willing to pay far more closely aligned with what the company is worth today than where it was valued at the peak of investor optimism.