When we first launched Notice, we staked a pretty big claim: that when it came to private company valuations, we “had to offer people the best, most reliable, price”.
But what, exactly, does “the best, most reliable price” mean? And how do you figure it out?
In fact, that’s the very first question I get asked in virtually every conversation I have with investors, bankers, brokers, family offices, funds, news organizations, and anyone else that has come to rely on the Notice Price.
Let’s step back and talk about prices.
For just about everything in our lives, we have a pretty privileged relationship with price, meaning: there is good price transparency, and prices are accurate. We know to the tenth of a cent how much a gallon of gas costs, and we can watch that price move every day. We’re not typically surprised on a day-to-day basis by the food prices we see on the shelf at the grocery store (well, maybe except for eggs).
There are really not a lot of prices in our lives subject to negotiation, except in a few notable instances (like, houses) where you have big, less liquid, and idiosyncratic assets. And even then, we’ve got increasingly more data and information, available to more people, to help clarify what the “right” price of a house might be (thanks, Zillow).
Boiled down, what this means is that most of the prices in our lives are what I call consensus prices: an observable, defensible price at which both the buyer and seller are comfortable transacting.
The public equity markets are an extraordinary example of consensus pricing in action: on any given day, for example, well over 70 million shares of Apple will change hands on the NASDAQ. Every one of those transactions dynamically values (and re-values) the company as buyers and sellers alike assimilate all the available information about Apple and translate it into a price where they are comfortable trading the stock. At any given point in time, we can see the consensus price of Apple.
Prices in the secondary private equity markets? That’s a different, trillion-dollar, story, and it turns out that it’s a huge problem even for the pros who do it for a living (see this recent Pitchbook story for just one example). To simplify, given that there are vastly fewer transactions, far less publicly available information, and enormous discrepancies in discoverable opinion on what a given company might be worth, to arrive at a consensus price — an observable, defensible price at which a buyer and a seller should be comfortable transacting — is an exceptionally complex undertaking.
So, how does Notice solve this problem? And why are we, and our partners, confident in the Notice Price? It’s all in how we build the Notice Price, which is rooted in our understanding of pricing as a problem with two key components.
The first is data itself — how much data, can we collect, index, and analyze to approach a price determination. The second is context. As statistician Nate Silver famously said, “data is useless without context”. We need to understand how reliable a data source is and how relevant it is to the overall price.
So at Notice, not only do we aggregate data from multiple channels, but we weight that data based on context. Particularly in the case where there are limited data sources, or the data is otherwise deeply informed by context, we need to make sure that our users understand the confidence we have in our price.
What does this mean, practically? Let’s run through the five major Notice Price inputs to provide concrete examples of how Notice builds prices, and seeks to arrive at a credible, defensible, consensus price.
First, let’s start with information that is typically used when talking about private company valuations: financing rounds. This data is clearly instructive, because it represents a consensus price arrived at between informed buyers and sellers. And, it is routinely used in news stories, press releases, and on other pricing platforms as a core determinant of value. The problem, of course, is that the value of this data decays — often significantly — over time.
Consider consumer lending company Klarna, for example. In April of 2022, an article published in Business Insider invited readers to “Meet the Leaders Behind Europe’s Most Valuable Private Company,” quoting the $45.6 billion enterprise value as of the company’s 2021 funding round.
Does it make any objective sense that a consumer lending company would hold its valuation steady despite soaring inflation, rising interest rates, a huge sell-off in public equity markets (including direct publicly-listed competitor Affirm losing roughly 75% of its market cap from its 2021 peak thru April 2022), and a land war in Europe involving nuclear powers?
It probably doesn’t to you, and it didn’t to us, either.
So, Notice uses financing rounds to inform the Notice Price, but we have developed a set of algorithms that take into consideration the decaying value of that data over time, and in context of multiple other factors. Further, we also do the work of properly evaluating and modeling the company’s cap table, to make certain that we account for share class, dilution, and any other factors that could impact the implied value of the funding. Incidentally, for our premium users, all of this information — including granular round descriptions, and investors — is in the platform.
Second, let’s consider internal valuations, provided by the company itself. When companies issue options to employees as compensation, they are required to file a form 409A which is an independent appraisal of the fair market value of a company’s stock (in turn, determining for tax and accounting rules the actual price of these options). Again, this source of information involves not only time decay, but also, it is widely understood that for a variety of reasons (including different classes of shares in a company’s capital structure) 409A appraisals tend to be more conservative (read, lower) than funding round valuations. So these factors must be accounted for and weighted for every company individually, and they are. For those who prefer primary sources, we also link our users directly to information about any form 409A issued by a given company.
Third, let’s consider external valuations. There are several types of regulated investment vehicles — like mutual funds, such as Fidelity — that must mark their investments (including their investments in private equity) to market on a regular basis, and file these marks, which itself tends to become news. Collecting information from these filings provides useful insights. At the same time, investors don’t always agree with each other on price, and it is not unusual for different funds, under the same investment umbrella, to have different marks for the same company. The size of a company’s position is also worth considering, as well as how diversified the investor base is. The Notice Price accounts for all this, and we provide this information to our Premium users for every company we monitor.
Fourth, since these are shares we are talking about, we obviously collect and use information from brokers who are actively transacting in shares of a given company. Notice Premium users can see individual bids, offers, and executed trades for a given company’s shares. Again, each data point, whether it is a bid or offer, or reported of a trade, needs to be weighted for context before inclusion in the Notice Price.
For one, Notice verifies trade data before we include it in our pricing model. Further, we weight broker data based on reputation — meaning, we look at broker trade volume in a particular company and lifetime. Again, this all makes intuitive sense, but it is complex and it takes time (which is why it took us years to get to where we are now). But it is incredibly valuable to our users, and further, we offer our users tools that allow them — should they want — to communicate with brokers who are involved in a particular company, in a FINRA-compliant way.
Fifth, as I wrote earlier, there is an extraordinary amount of information about valuation crystallized in the prices of publicly-traded companies. To the degree that there are highly-relevant public comparables for a private company (e.g. Klarna and Affirm) it is objectively clear that private market valuations should reflect public market movements. Notice uses a proprietary broad basket of public and private peers as a component of our pricing model, and offers our users the ability to use the publicly-traded company of their choice to compare price performance.
These five key inputs, in combination with multiple other factors, are considered and weighted by our algorithms to deliver the Notice Price. We strongly believe that the Notice Price represents the best available consensus price for private venture-backed companies.
That said, and to be clear, we’re not claiming perfection. Prices are dynamic, despite circumstances with the highest visibility and liquidity (think about those 70 million shares of Apple stock, and how the price changes from second to second over the course of the trading day). Liquidity ebbs and flows, new information enters the market, and thus private market consensus pricing not only changes, but so does the strength of the signal. What Notice does is seek to be as smart and as agile as possible in identifying consensus when it exists and overweighting relevant macro data when there is no clear consensus.
We have spent years building our platform, and learning not only about what data should inform our pricing, but just as importantly, what data we should underweight — or even ignore. After all, sellers tend to want high prices, and buyers prefer to pay less, and in any negotiated transaction, you would rarely expect a bid or an offer to be a “best and final” price. We’re also aware that we can always improve — in fact, our users not only get all the information we’ve been talking about, but for every price we publish, we also publish a corresponding signal strength. In other words, our users know just how confident we are in the capacity of the available underlying data used to generate a consensus price.
Finally, our users are always making us better. We hold ourselves to a high standard, and so do the people who use us. Whether we’re working with brokers, investors, academics or news organizations, we are always being provided with new data and insights that continue to improve our pricing algorithms.
As I wrote when we launched, it’s nuts that there’s an asset class, worth trillions of dollars, where nobody knows what’s going on. If we’re going to have transparency, growth, and confidence in this market, it is my strong belief that consensus pricing is the foundational ingredient.
For us at Notice, the mission is clear: first, build the best price, and then make sure anyone who wants it, can have it.