Introducing ScaleX’s new Waterfall model: a Game-Changer for Tech Investors

In venture capital, understanding how gains are distributed during a liquidity event is critical for both General Partners (GPs) and investors. As discussed in our previous article, Understanding Waterfall Mechanisms in Venture Capital: Impact on GP’s Returns, the "waterfall" structure plays a pivotal role in determining the flow of profits in events like acquisitions or IPOs. These mechanisms can significantly influence the returns investors, especially GPs, receive from their portfolios.

Today, we are excited to announce the launch of our new Waterfall Valuation Model, a feature designed to help tech investors evaluate the fair value of their assets while considering liquidation preferences. This feature aims to bring unprecedented clarity and accuracy to portfolio valuations by providing a seamless way to incorporate waterfall mechanisms into asset assessments.

How Does the Waterfall Model Impact Asset Valuations?

Waterfall mechanisms dictate the hierarchy of payouts when assets are liquidated, significantly altering the net asset value (NAV) investors can expect. By accounting for liquidation preferences—such as fully or non-participating preferences—investors can better understand how proceeds are allocated, impacting the overall valuation of their portfolios.

With ScaleX’s new feature, investors can now factor in these essential preferences with ease, leading to more precise and realistic valuations.

Key Features of ScaleX’s Waterfall Valuation Model

Our new Waterfall Valuation Model is designed with both simplicity and power in mind. Here are the key steps and how it streamlines the process for tech investors:

Select the Liquidation Preference Type

‍Fully participating or non-participating liquidation preferences. Non-participating preferences are commonly used in venture capital, and these choices drastically affect the valuation outcome.

With or without carve-out, a safeguard for common shareholders that allocates a percentage of the value to them, irrespective of liquidation preferences. This mechanism is frequently used in regions like France to protect early-stage investors.

Simplified Cap Table Entry

Investors can input a concise capitalisation table (Cap Table), defining share classes, the number of shares, and the conversion conditions for preferred shares. These conversion conditions are usually dictated by an investment multiple or conversion price.

Account for Dilution

For a fully diluted valuation, users can add scenarios such as employee stock options or other dilution factors. This step is crucial for achieving a complete, forward-looking valuation of their portfolio.

Validate and Visualise the Waterfall Calculation

Once all inputs are verified, the model calculates the distribution of equity value between  shareholders. Investors can see a breakdown of how the equity value is distributed among different shareholders under various liquidation scenarios. The results offer an instant, actionable view of how the waterfall mechanism could affect their fund’s performance. 

Activate Waterfall to Adjust NAV

After reviewing the results, users have the option to activate or deactivate the waterfall mechanism. When activated, the waterfall calculations directly impact the theoretical NAV, allowing users to see how liquidation preferences alter their fund’s returns - positively or negatively.

Why this Feature is a Game-Changer for Tech Investors

Accurate portfolio valuation is a cornerstone of successful venture capital investing. By incorporating waterfall mechanisms into its valuation models, ScaleX empowers investors with a deeper understanding of how liquidation events may impact their returns. With intuitive data entry and clear visual outputs, the Waterfall Valuation Model helps users make data-driven decisions, optimise fund performance, and better assess risks.

Whether you're an early-stage investor or managing a large venture fund, the ScaleX Waterfall Valuation Model is a must-have tool for ensuring accurate and insightful valuations.