Digital health. Gaming. Blockchain. AR/VR. Cybersecurity. Cloud computing. No, we’re not just naming all the trendiest sectors in the market today. These are the types of assets that this venture capital incubator holds in their portfolio.
There has been a lot of chatter within our community about Victory Square Technologies (Canada: VST) (U.S.: VSQTF) (Europe: 6F6). This cutting-edge tech company invests in, acquires, and builds disruptive companies while they’re still extremely early stage. Victory Square is looking to claim a stake in companies that use AI, VR/AR, blockchain, and more to create disruptive, innovative approaches within a variety of sectors including healthcare, esports, fintech, gaming, and even insurance.
Figuring out how to value a company like this is not the same as valuing any ordinary company, in which one may find themselves looking at revenues, profits, margins, production, or earnings-per-share. Instead, VST is an incubation company and venture builder. It owns anywhere from 5-100% of its subsidiaries and focuses on helping the businesses grow out of the early stage. In their own words: “We offer early-stage access to the next unicorns before they’re unicorns.”
What is a Venture Capital Incubator? How Does it Compare to a Fund?
Gaining exposure to an incubator company in the public markets is a unique experience on its own; you’re purchasing a part of a company that owns a part of many companies. An incubator company is a way to get diversified exposure to an umbrella of assets that would either be too costly or inaccessible to invest in individually.
Most people know about passive investors, which provide help with the financial end alone. Mutual funds and ETFs both invest in different types of companies with different types of financial instruments (stocks, bonds, T-bills) – Researching each stock, figuring out the proper allocation, and buying them individually through a broker would be not only quite time consuming, but the commissions would add up very fast. Mutual funds and ETFs have no personal involvement with the companies, though. In this way, it’s “hands-off” access to these investments.
Venture builders, such as VST, invest in a basket of early-stage companies. The obvious advantage being that, as a majority of these “pre-unicorn” companies are private, you can’t just sign up for a brokerage and invest in them immediately. By the time they go public, their valuation will likely be a lot higher than when they were private. Plus, as a “hands-on” partner for the companies, Victory Square provides guidance, executives, and expertise in operations, growth, legal, financial management, and industry knowledge, in addition to the capital injection. In this way, you’re investing in both the subsidiary companies and the partnership.
What Does VST Own?
VST currently owns 23 companies.
One of VST’s most newsworthy acquisitions is FansUnite, an esports betting platform. FansUnite plans to be the leaders of the iGaming industry by providing players and partners by utilizing vertically integrated, versatile platforms. With a portfolio of unique products, FansUnite focuses on esports, casino, and sports betting.
Betting on FansUnite wasn’t an accident – the esports market was quoted as being worth $950 million in 2020 and is projected to be worth $1.6 billion in 2023. VST initially acquired 100% of FANS in a $2,000,000 all-stock deal; today, their stake sits at an impressive $15,000,000, even after locking in profits by selling over 90% of their position. FansUnite sits at an impressive $160+ million market cap at the time of writing.
V2 Games: another company that VST acquired 100% of in 2017 for $1.4M in an all-stock transaction. V2 Games, in turn, recently acquired another company called GameOn in an all-stock transaction for $3.8M. The total combined value is $11.1M and the company is going to be going public soon, with comparable companies currently valued by the market within a range of $40-600M. While this is obviously a wide range, even the low-end comparable companies signify that V2 has a lot of room to grow.
Another one of their companies, ImmersiveTech, a 100% owned subsidiary of Victory Square, is also going public this year. Immersive recently launched a new location-based entertainment (LBE) virtual-reality attractions division called Uncontained. Uncontained will be the world’s first free-roam interactive VR franchise attraction, built for a COVID-19 world, within shipping containers. The company also hired Steven Dooner, former senior executive of The Void, to build out the franchise. A close comparable company that we’ve found, NTAR, is currently trading at a $500M market cap.
If this diversification wasn’t enough, on Feb 1, VST acquired intellectual property assets of Aspen Technologies, a tech company whose primary focus is building out blockchain and cybersecurity solutions. Days later, they announced another acquisition deal worth $1.6 million USD to acquire 100% of Hydreight, a mobile health and wellness provider operating in the U.S.
So, How Do You Value Them?
Individual public companies are typically analyzed by taking net earnings and dividing them by the number of outstanding shares (an equation to calculate earnings-per-share). How well this valuation aligns with that company’s market cap (which is calculated by multiplying share price by shares outstanding) is generally an indication of whether the company is over- or under-valued compared to the books. Often, nuanced details within the financial statements are also used in order to see a company’s true long-term potential.
Keep in mind, most early-stage companies’ market caps are well beyond their earnings – don’t fret – this is normal with growth stocks, which are often valued for their future potential. Once companies leave “penny stock” territory and start to fundamentally develop, you will generally see earnings and market cap align more.
Companies like VST on the other hand, are judged based on their Net Asset Value (NAV). This is their total assets minus their total liabilities, which you can normally find out by simply looking at the balance sheet of a company; however, venture builders’ asset bases become a bit more complex. You can determine their total asset value by looking at the valuation of each portfolio company and multiplying that figure by the percentage the holding company owns. For example, if a holding company owned 10% of a company that was valued at $100M, this would represent a $10M asset for the holding company. Public companies, which have a readily accessible market cap, are easy to value. There are other assumptions that come into play when the asset isn’t yet public, though. Pre-public companies (aka, those still operating privately), are compared to similar companies who are currently public, then determining how closely they can compare. Smaller companies with fewer comparables are, instead, valued based on the last financing from angel investors.
The ambiguity around private company valuations makes the exact figure hard to nail down, so we choose to err on the side of caution to come up with a conservative number. By looking through a comprehensive list of ownership percentage multiplied by market cap, angel list valuations, the last financing price, close public comparables, and all other useful data points we can find, we’ve realized that the NAV of Victory Square Technologies is, at the bare minimum, in the range of $85-90M range, as of the current moment.
With the company trading at a (quite large) discount to its NAV, subsidiaries eying a public market appearance, and continuous growth on the horizon, we believe that this is a company that you should add to your watchlist ASAP.
Disclaimer: Victory Square Technologies is a communications client of Edge Investments, and we own shares in the company.