Getting the right valuation

Ever since we decided to issue a security token, the topic of valuation, or what our company is and will be worth, has become increasingly dominant. In the ICO world, it seems that tens to hundreds of millions can be raised for utility tokens without anyone ever asking if there’s something to substantiate them. It doesn’t matter that both SEC and FINMA, the American and Swiss financial regulators, regard almost all tokens as security tokens. As opposed to the utility token offering, as soon as we decided to offer a security token, valuation won out as the most critical topic.

The topic of valuation isn’t something to avoid, but discussions about how high the appraisal should be can cause disagreements. As Heinrich Zetlmayer of BVV attests, valuation is more of an art than a science. Hans-Jörg Bärtschi, board member and financier for Securosys, indicates that traditionally a variety of metrics, such as earnings ratios or asset ratios, have been applied to valuate companies. However, he concedes that these methods often fail miserably when considering young companies in new and growing markets. The income and asset approach disregard the immense potential of the new business world. This is why Hans-Jörg favors the market approach, with which he attempts to compare the company to those in the real market place in order to form an assessment of a business’ worth. Even then, if it is a brand-new, accelerating market, then often only imagination works!

We frequently meet with various types of investors, be they institutional financiers, venture capitalists, or private people who just have a lot of dough on the side. They’ve decided that they really like our company and want to invest. We love them since they try hard to understand what we are doing, what our focus is, and how we want to build up Securosys. They are thrilled by our new technology, which inevitably tends to accelerate their fantasies about the potential of entirely new markets with dimensions beyond anybody’s imagination. However, when the discussion moves to how much they should invest, some of our investors flip into a different mindset, getting fixated on owning a certain percentage of the company rather than imagining how large Securosys could become. Now, this is not new to us. Even when we did our seed round 4 years ago, we had angel investors who wanted to put in 25k for a 10% stake, which was a difficult proposition when trying to raise a total of one million.

In the new world it’s different. Remember when Microsoft got a stake of Facebook in 2007? They invested $240 million at a $15 billion valuation, which gave them only 1.6% of all Facebook shares. People thought Microsoft was crazy to spend so much on so little. But who is laughing now? Even after the $120 billion market capitalization drop a few weeks ago, Facebook is still worth more than $500 billion. That is over 30x more than when Microsoft invested, a return most investors only dream of. If Microsoft had insisted on 5% or 10% of Facebook, they would have been left out of an incredible $8 billion in profit! Now, while Securosys is no Facebook, the situation is different but similar.

If Securosys only served legacy markets, our valuation would undoubtedly be smaller than what we are asking for. Such a valuation could be based on how our competitors are prized. One data point is from when Safenet/Gemalto tried to acquire Ncipher. The offer in 2006 was around $150 million at $30 million of revenue. Based on this example, which is from a time when HSMs were not even a thing yet, the price-to-revenue multiple was five. That’s a good start. However, for new companies in growing markets in the tech field, venture capitalists often use a basic valuation that is at least ten times the revenue. Nevertheless, this is still backward-looking, still an old-fashioned view!

As opposed to companies that issue utility tokens, we cannot escape the valuation discussion. We must ask ourselves how we can rationalize our high valuation and how we can substantiate an expected pre-money valuation of around 13–15 times last years’ revenue. Simple arguments like: “Securosys may be expensive for Swiss standards, yet is fairly priced for European expectations, and cheap for Silicon Valley,” or “Valuations have gone up since 2006,” won’t convince local investors. We have to add more meat to the bone, and that meat is the many new markets we serve. Our total available market (TAM) and serviceable available market (SAM) don’t just increase by a few percentage points — they multiply, and so does our valuation!

Looking at these new markets, upfront and foremost are crypto currencies and assets. First mover investors, cypherpunks, and crypto kiddies have made lots of money with it, but most didn’t know about it. Publicly, many banks are belittling crypto currencies, yet behind the scenes nearly all of them are preparing to enter this market. Why? Because their customers want to participate, to try to obtain these huge gains and returns, and banks are always on the lookout for new businesses. This is where Securosys comes in. We have the best solution to deliver enterprise-grade security for crypto assets. What’s even better is that no HSM vendor is established in the crypto currency marketplace — as opposed to the legacy markets we also serve. We have the opportunity to enter into an open playing field an immense opportunity, a blue ocean. And we have the best solution ready for it!

The next big market is blockchain systems beside crypto currencies. Over the next five to ten years, a helluva number of systems will be converted to blockchain. This includes public blockchains, but even more so private or so-called permissioned blockchains. Why will systems be converted to blockchain? Because it’s simpler, participants can verify transactions themselves, and there’s no need to rely on a central authority! Ultimately, this will make it cheaper. Just look at the Australian stock exchange (ASX). They are converting their entire settlement system to a permissioned blockchain, designed by Digital Asset.

A third new, large market for HSMs will be the Internet of Things (IoT). Okay, I can hear you asking: “Is he just going to list all the fancy keywords investors like to hear these days?” Why the IoT? Honestly, it’s a mess. It has to be fixed quickly if we don’t want it to destroy the Internet as we know it. There shouldn’t be anything on the Internet that isn’t identified or authenticated. Any system should only be able to talk to items connected to the Internet that can be authenticated and sign their messages. If we don’t insist on this, then these Internet devices will be hacked, flooding the Internet and taking it down. We already saw it when the Mirai botnet took over unsecured digital video recorders, webcams, and similar products. DNS servers on the East Coast of the US suffered a huge distributed denial-of-service (DDoS) attack by a botnet, and subsequently the Internet in that region stopped working for hours. Since most things on the Internet are too small and dumb to sign their messages, an identity/key management system will be necessary. This is where Securosys comes in with our large-memory HSMs.

Crypto currency, blockchain, and the IoT are three markets that weren’t really around a few years back that have come up besides the other new markets we’ve already started to serve: GDPR, digital signature, and eIdentity (check out our website if you are interested in them).

Looking at it in a different way, we realized over 90% of our revenue in 2017 in Switzerland. If we can flip that around and achieve 90% of our revenue outside of Switzerland, then we grow our company by a factor of 10. That would mean opening up new countries, setting up subsidiaries – wait, I am just repeating our whitepaper. The top financial markets, EU, Singapore, Hong Kong, Dubai, London, USA, are all much bigger than Switzerland. Seems to be an achievable goal over the next three to four years.

The opportunity is here now. We want our investors to join us, to participate in Securosys, to understand how big the opportunity is in these new markets is, and how well we can compete in them! And let me tell you: we are ready, we are expanding, and we are executing!

Editorial note: Most of this post appeared first on medium.com and is reposted here. It is the sixth blog in a series describing the Securosys STO.

Here is the fifth blog "Moving to a Security Token"

Here is the next blog "I just built an ICO platform with your HSM"

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Robert (RoRo) is a technology executive and entrepreneur. He is the CEO and co-founder of Securosys, a leader in cyber and blockchain security, serving customers with its HSM network appliances (and cloud service) all over the world.

You can connect with him directly or reach him via email: roro (at) securosys (dot) ch

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