Continuing on the margin compression theme originally laid out in Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups, I illustrate mathematically how the bit startups in the Bitcoin space will be forced to reach up the foodchain rungs faster than many think.
Valuation of BITPAY, COINBASE and CIRCLE
This is an exercise to arrive at valuation of three of the well-known Bitcoin applications that have recently been in news for funding from investors. Unlike high-level valuations assigned to these companies we analyzed revenues in much deeper detail, segregating value drivers and revenue streams and projecting them for the foreseeable future. This thus has enabled a more granular valuation than the high-level valuation that we see in the news for these companies in their recent funding rounds.
Valuation Case 1- BITPAY
BITPAY revenue plan is based on monthly subscription model wherein the company charges $30, $300 and custom negotiated rates that are not published, under different subscription plans. Currently, Bitpay claims ~30,000 subscribers.
For the purpose of calculating revenue from each plan, total subscribers (30,000) have been segregated under each plan based on their probability of occurrence (and put a nominal fee for ad hoc, a la carte and custom services on the higher ends of the range). Multiplying probable subscribers with subscription fee resulted in total revenue for the company.
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Table 1- Revenue Forecast, US$ |
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Subscription Plans |
2014F |
2015F |
2016F |
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Plan 1 |
10,260,000 |
11,850,300 |
13,310,257 |
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Plan 2 |
4,320,000 |
4,944,240 |
5,501,950 |
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Plan 3 |
10,260,000 |
11,634,840 |
12,826,248 |
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Plan 4 |
5,400,000 |
6,066,900 |
6,625,055 |
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Total Revenue |
30,240,000 |
34,496,280 |
38,263,510 |
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As per the news for funding in Bitpay, its valuation is estimated at $160 million. If we apply multiple at which Coinbase and Circle are estimated to have been funded recently (using average revenue multiple of Coinbase and Circle), the valuation based on 2015 and 2016 revenues is as shown below: Table 2- Relative valuation |
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Particulars |
2015F |
2016F |
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Revenue ($) |
34,496,280 |
38,263,510 |
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Multiple Comparable- Coinbase and Circle |
29.7x |
25.3x |
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Valuation (US$mn) |
1,023.47 |
968.13 |
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Now, those of you who pay attention are likely to query, "Looks interesting... A billion dollar company within two years, but why is the valuation actually droppingin the 3rd year?". Well, this brings back to the article "Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups". You see, Bitpay and its contemporaries are growing like gangbusters (~6% to 10% per month!), but they are selling service with relatively low barriers to entry, and a lot of capital and competition climbing over the bow.
High competitionin a liquidiy bubble yields low, zero or negative (loss leader) margins. Valuations will follow suit, even as revenues and growth rates continue climb.
If I am correct, then Bitpay (as well as contemporary start-up competitor Circle and Coinbase, in addition to more entrenched competitions Master Card, Visa, American Express and PayPal) will offer plain vanilla payment processing at negative margins in an attempt have it serve as a loss leader to rope merchants (etc.) into high margin, better defensible products and services. Cue...
