Valuations and Sources of Volatility: Part 4 – Early IPOs

This is the fourth post in our series discussing new sources of volatility in our valuations. In this post, we want to discuss how some of our portfolio companies are seeking to access the public markets for growth capital rather than relying on further rounds within the private markets. This trend introduces another source of volatility to our values since once a company is publicly traded, its valuation is often based on the closing price as of the date of valuation. This closing price can fluctuate significantly from quarter to quarter, making our valuations based on the closing price volatile.

My colleague, Doug Jamison, has written a number of posts discussing the importance of bringing back small initial public offerings as a way to finance the growth of deep science companies. These posts provide background on the history of how some of today’s most successful companies (e.g., Amgen, Genentech, Intel) started off as ones raising less than $50 million in initial public offerings. These companies used the IPO process as a financing transaction rather than a liquidity transaction. Many companies have used the catalyst of a small public offering as a spring board to becoming great companies.

We wish to replicate this historical path to success with our portfolio companies. Two recent examples of companies from our portfolio that completed public listings and raised capital to build their businesses were Enumeral Biomedical Holdings, Inc. (OTC: ENUM) and OpGen, Inc. (NASDAQ: OPGN). We believe each of these companies has significant potential to build a successful business and the capital to available to them to reach this potential was more available to them at an acceptable valuation from the public markets than from the private markets.

So why is it important to look at the effect on the volatility of our valuations of our portfolio companies becoming publicly traded? In short, the reasons are 1) fluctuations in stock price and 2) our ownership of these publicly traded companies.

Under option pricing models and multiples to revenue, our values fluctuate, in part, based on the changes in value of sets of multiple comparable publicly traded companies. While these movements can be volatile, the use of multiple companies can dampen the change that might occur if the change in value of only one company was used to derive value. Once a company is publicly traded, we are often required to calculate the value based solely on the closing price per share as of the date of valuation. Given that the stock prices of micro-capitalization publicly traded companies are often very volatile, it is not unheard of to see movements of stock price of 50-100 percent quarter over quarter.

Now, historically when we owned small portions of these companies following public listings, such movements may not have been that material to our overall net assets. As we discuss in our public filings and presentations, we have been and continue to seek to increase our ownership in our best companies. Just look at Enumeral and OpGen. We own approximately 15 percent and 13 percent of the voting securities of these companies, respectively. We were able to maintain such levels of ownership by raising capital at relatively low costs through public offerings.

So now let’s combine these two factors together using Enumeral and OpGen as examples. As of the close on Friday, May 15, 2015, each company’s market capitalization was approximately $35 million and $43 million, respectively.


Let’s say these companies double in market capitalization… as you can see from the table below, a swing in stock price similar to that above would have an even greater affect on the change in NAV / Share.


And these potentially significant movements in our NAV per share could be generated by only two of our over 20 portfolio companies. Imagine if more of our portfolio companies complete such transactions and transitions from privately held companies to publicly traded companies…. If we are successful in helping our portfolio companies to do so, we think the opportunity to build value through our significant ownership is high, but we also expect our values of these holdings will also be highly volatile in the short-term.