Valuation Inflation

  1. 2nd and 3rd seed rounds to “buy more time for the A” because the company either doesn’t have the momentum to get an A round done or the founders want to achieve a high valuation / big raise. Companies can end up 3 rounds in, early investors tapped out, with a post in the high teens or 20s before going out for the A round. This can be the beginning of the lean over the skis…and create a super high hurdle for the next round. When that round takes too long or the terms aren’t to the company’s liking…it puts the entire business at risk and the options become limited, fast.
  2. Competitive ratcheting — Company A, raises 20M on 60 pre because they are in SF and a 1B fund backed them. They still sold 25% of the business, and they are going to burn the 20M in 2 years. The investors and CEO want to “king-make” this company by building a financial moat around it that deters the rest of the market. If I’m being cynical, the product at this company is probably the 3rd priority. Quickly, Company B in the same space feels intense pressure to raise as much or more in order to be seen as equal in the market. They go pitch every big firm they can for their 20M round, but no one bites, because they are in Chicago not SF and now seen as #2 at best given the obsession the tech press has with valuations. Had they gone out for 5 and raised 7, they’d be back at the shop building product. Now they are 4 months from cash-out and morale is tanking.
  3. The cost of winning — Dustin’s point above is actually an important one as part of what I think he’s alluding to is the “the cost of winning” the press / mindshare game in a place like the bay area right now. Its all just math and relative percentages so when you get $1B funds doing early stage investing the intersection of the fund needing to write a large enough check for it to be worthwhile x the valuation itself providing leverage for the business x the 20M still only lasting 18 months in SF…I can understand how the system enables an early stage business to have an 80M-100M post, and how you get to the place of a 1B valuation pretty quickly if the starting point is grossly inflated.

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Co-Founder and MD @ Massive.vc, Partner @ The Fund Rockies. Prev: Techstars VC, Co-Founder @ Filtrbox (sold to Jive) Co-Founder @ JustOn.com (sold to Novell).

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Thoughts from the Frontier

Thoughts from the Frontier

Co-Founder and MD @ Massive.vc, Partner @ The Fund Rockies. Prev: Techstars VC, Co-Founder @ Filtrbox (sold to Jive) Co-Founder @ JustOn.com (sold to Novell).

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