Why one Databricks investor thinks the company may be undervalued

The recent Databricks funding round, a $1 billion investment at a $28 billion valuation, was one of the year’s most notable private investments so far.

For Databricks signaled its IPO readiness by disclosing to TechCrunch last year that it had scaled its revenue run rate from $200 million to $350 million in a year, so the new capital looked like the capstone on its private fundraising before an eventual public debut.

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But I did have a few questions, starting with the price of the round.

At a $28 billion valuation and ARR of $425 million, Databricks is valued at around 66x top line. That’s steep, if not the highest number we can dredge up on the public markets. Of course, for Databricks shareholders, seeing the value of their stock rise so quickly is hardly a bad thing. They are hardly going to complain about having more paper wealth.

But what about the investor perspective? Does the price really make sense? The Exchange caught up with Battery Ventures’ Dharmesh Thakker earlier this week to discuss a number of things, one of which was Databricks’ round and pricing. Thakker is named in the Databricks Series D funding announcement, which brought Battery into the company.

What was surprising about our conversation was not that Thakker was bullish on Databricks — a company that he and his firm have backed since its $140 million, 2017 round when the company was worth just under $1 billion. What surprised me was that he thinks its new $28 billion valuation might be a little low.

Intriguing, yeah? So this morning for both of us, I’ve pulled out quotes from our chat to help explain how Thakker views the market for Databricks, unicorns at scale more broadly through the lens of risk-adjusted investing, and the scale of the market some unicorns are playing in.

At the close, we’ll remind ourselves what Databricks CEO Ali Ghodsi told TechCrunch when we asked him the same question. Let’s go!

Databricks at $28 billion

Here’s how the valuation part of my chat with the Battery Ventures’ investor went down:

The Exchange: I want to talk about Databricks, because I spoke to [CEO] Ali [Ghodsi] yesterday about this round, and hot damn, it’s a lot of money at a valuation that is roughly 64x ARR, give or take. I don’t understand the price, and I know it’s a boring thing to talk about. [It’s a] great company, I get their market, I’ve talked to them a bunch, I know their revenue numbers. [But] I don’t understand the price, and I was hoping you could tell me why I’m being too conservative.

Dharmesh Thakker:  I, for what it’s worth, think [the price] fair. If anything, I think it is on the lower end — he could have done better, frankly. But I think it comes down to three major things, right?

One is the addressable market. Just think about the addressable market of data. If there’s a trillion dollars spent in software or technology, I think you and I would be both hard pressed to say, almost all of that [isn’t] influenced by some data-oriented decisioning. Whether it’s digital transformation, whether it’s analytics, data is everywhere. So the TAM is massive … I think you and I both agree on that, whether it is $20 billion or $80 billion — it’s massive.

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