For today's interview, we spoke with Dat Do, the founder and CEO of Derivitas (www.derivatas.com), a new startup in Los Angeles looking to address some of the financial issues that CFOs of privately held firms have to deal with. Dat told us about the issues with valuation, how his experience in a Big 4 accounting firm led to starting the company, and where the company is going next.
What does your company do?
Dat Do: We produce valuation software that solves a lot of complex valuation issues for privately held companies, backed by venture capital and private equity. Basically, we're taking the expertise I have in financial engineering, we've come up with software that allocated enterprise value to various securities, such as Series A, Series B preferred, and common stock options.
What's your background?
Dat Do: For the last five years or so, I worked at PricewaterhouseCoopers here in LA. I was the valuation specialist / financial engineer for the firm. There were about maybe less than a dozen of us there. My specialty was valuing privately held companies, particularly those that were VC-backed, PE-backed, particularly those that were pre-IPO stage, up to the point they went to IPO. That's my background in valuation.
Why did you decide to start your own company?
Dat Do: That's a great question. I came up with the idea, mentioning it to the PwC partners a few years ago. They liked it, but PwC's business model doesn't incorporate this. A Big 4 firm doesn't produce anything, they only advise companies--it's just not in their business model. When I left three months ago, the partners were supportive, telling me that they knew it was my passion, that I wanted to do this, and if it doesn't work out you can come back. They told me they'd help me out in the market, which I was very thankful for, because I wasn't expecting it. One of the reasons I saw this, is I saw the need in the market. Year after year, we would tell our clients that they needed to have their valuation performed. The problem is there aren't that many experts out there doing valuation, but the FASB accounting standards require valuation. It's not exactly new, but very few people know how to do the valuations, because it's fairly complex. As a result of that, companies were having to pay on average $12,000 per report, and if you went to the Big 4, it might cost you $30,000 per report. These startup companies can't afford to pay that for valuation every single time they issue stock options to their employees. Once they get larger, they can afford that, but at the stage they need it most, they just can't afford it.
We got a lot of pushback from our clients on why we need to do this, and that it's so expensive. We couldn't give them the models and then sign off on it, because it's illegal. So, we were between a rock and a hard place in trying to help our clients as I talked to CFOs of the VCs, PEs, and privately held companies. I couldn't think of any way to help them, except to break away and create something much more reasonable for them to use.
Who would be purchasing the software?
Dat Do: It would be the VCs, the PEs, management of privately held companies. The CFOs who would require this to determine what their next financing round should cost. How to price it. Audit firms like PwC, potentially a client, they would use it to review it when they received the valuation. So those would be the verticals, the VCs, the PEs, valuation shops, and the audit firms.
Where are you in terms of availability?
Dat Do: It is available right now, we're in beta testing phase right now. We tested it internally through alpha, and the mathematics are solid, and we now want end users to test it out to see if there is other features and functionality they would like to see. The core engine is solid and we want people to test it out and give us feedback. Right now, for a limited time it is free for use, and we'll be making adjustments and then start charging.
Is this a service or installed on a computer?
Dat Do: We're structured as a software-as-a-service company, so we have a server where people can login to. There is nothing to install on the desktop.
Have you gotten any funding?
Dat Do: Our first round was an angel funding, which helped us to build to this stage. We're in the process of raising another round from private investors--we're not looking for venture or institutional investors yet. We may need to in the future, but at this stage we're trying to beta test this thing, to reach that milestone and take it to the next stage.
What's next for you?
Dat Do: The next step for us in our development is to develop other models on top of our OPM, our option pricing method, the core part of our software. We'll be adding the probability weighted expected return method, the current value method, other allocation methods we're going to fill in. Those are additional models we're putting into them. This right now is the most popular and appropriate model in the industry, so we started there.
What's the most biggest thing you've learned so far in starting your own company?
Dat Do: There are lots of things I've learned. Probably the biggest is that it's not that easy developing software. I personally have taken software for granted, using Microsoft Word, Excel, and other software. I'm not a software developer of engineer, but seeing the whole process and working to put software together, I realize now how difficult it is. I know valuation, and can do it with my eyes closed, but to sit down and help someone else program and code it was a completely different thinking. I had to take a step back and think of every possible scenario in a calculation. That to me, was the hardest thing, and wasn't part of my core skill set.