High Valuations?

imgresI have a thesis and it is strictly around how much money I put in at the beginning, the amount I want to own of the company and that is directly connected to the valuation or cap.

I am about to go on a rant.

10 years ago the valuations were very different.  In the past decade I’d say on average the first round of most of the companies I invested in had a $3 – 5 million cap.  Considering that the entrepreneur had spent some serious time building out the company, gaining traction, flushing out the product, etc. I was ok with that valuation.  I figure if we all believed that the potential was there that it was ok to start at this price.

Fast forward.  In the past week I have talked to more entrepreneurs that are raising rounds post their “friends and family” of $300-500K with new valuations at $6.5-8m.  Keep in mind the majority of friends and family rounds have no cap on them. Companies are saying that they need $2m now not $750K but a bigger chunk of cash to grow.  Really?  There is something to be said for being scrappy with $750 and proving out the model before going in for the big check.

Who is pushing up these valuations?  Accelerators and egos.  I can’t decide what is worse.  The insane valuations that means that the next valuation will be bigger, the expectations are much higher and the exit needs to be bigger and bigger and bigger.  Or the swagger and cockiness of some of the entrepreneurs who are getting feedback from investors who are telling them that they should definitely raise that much.  I know what happens.  I have been in those movies.  Many investors say definitely and do nothing.  They don’t write the check, they don’t move forward and then that entrepreneur has to rethink the raise, the people they are talking to and everything else.  The entrepreneurs then come back with their tail between their legs.  The first step is important and when you have little traction, a barely proven product and really zero revenue then the valuation should reflect that.

Maybe I am just talking to some of the wrong entrepreneurs.  It isn’t about the amount you think your company is worth today it is about what you make it worth. I would be applauding an entrepreneur that started low, raised enough that allowed them 18 month runway, did it again and figured out the model to the point that their valuation then reflected what they had built.  I have always said if the company is proving itself there will always be an investor.  Now I fear that you don’t even have to prove yourself to find an investor.  Is that a bubble?  I am not so sure but it is certainly not a good thing.

How do these companies get to the valuation with very little in hand?  I just don’t get it and I am pretty sure I never will.

Comments (Archived):

  1. Anne Libby

    I remember the late 90s, before either shoe dropped, when a long defunct (short lived) company I was at briefly bragged that they had taken a PowerPoint deck to an investment bank and gotten a $35 million valuation based on (almost) air.And so it goes…

  2. drmarasmith

    Thank you Joanne! As an “older” entrepreneur, the numbers I hear on startup valuations not only seem outrageous to me, but literally based on nothing. I can’t tell you how much I appreciate hearing someone say these numbers correlate directly with arrogance and swagger. I am taking a much more conservative path and am very satisfied with it. That decision is based on a lot of hard work, consideration, respect and a high bar for integrity and responsibility. I can’t stand being at events and listening to these crazy numbers being accompanied by so much self aggrandizing and bloviating – it is exhausting. In all of the conversations on tech and diversity, lets not forget age – a longer timeline of experiences can provide a much better framework for sensibility, prudence and realism.

    1. meredithcollinz

      We’ve gone the really conservative route, too, both in terms of fundraising and research, and honestly, it’s been pretty great. We got very creative in every way and people are shocked at what we built with so little. We have tons more to do for sure and I’m not saying we haven’t made any mistakes, but we, too, took a very considered approach, and built something really solid for it. When I first started thinking about this business, one VC urged me to raise as much as possible and to move really fast, but I really wanted to do some research. I actually care about what I am building and feel a very serious responsibility to the people who entrusted me with their investment, and while I am a very scrappy person and have always felt I could do anything, there are many aspects of building a tech company (including raising money) that I’ve never done before and thought it was important to get the lay of the land. Six weeks later, he told me that my “inaction” showed my lack of confidence and that “the train will never leave the station.” Of course, I thought of him the day we launched and discovered that people had been submitting lyrics and building profile pages in several countries and across the US before it even registered online here in NYC. If I was younger, I may have taken his advice (because I would have lacked the confidence – ha), blown a lot of money and would not have nearly as much to show for a lot of hard work – nor would I have just created a partnership with the producer of the Oscars! I agree with Joanne about ego and think sometimes everybody gets caught up in the thrill of the chase making valuations skyrocket, but, IMHO, the folks who march to the beat of their own drum are the folks who create the most lasting value.

    2. meredithcollinzzz

      We’ve gone the really conservative route, too, both in terms of fundraising and research, and honestly, it’s been pretty great. We got very creative in every way and people are shocked at what we built with so little. We have tons more to do for sure and I’m not saying we haven’t made any mistakes, but we, too, took a very considered approach, and built something really solid for it.When I first started thinking about this business, one VC urged me to raise as much as possible and to move really fast, but I really wanted to do some research. I actually care about what I am building and feel a very serious responsibility to the people who entrusted me with their investment, and while I am a very scrappy person and have always felt I could do anything, there are many aspects of building a tech company (including raising money) that I’ve never done before and thought it was important to get the lay of the land. Six weeks later, he told me that my “inaction” showed my lack of confidence and that “the train will never leave the station.” Of course, I thought of him the day we launched and discovered that people had been submitting lyrics and building profile pages all across the US and Europe even before it registered online here in NYC ;~).If I was younger, I may have taken his advice (because I would have lacked the confidence – ha), perhaps blown a lot of money and would not have nearly as much to show for a lot of hard work – nor would I have just created a partnership with the producer of the Oscars! I agree with Joanne about ego and think sometimes folks get caught up in the thrill of the chase, causing skyrocketing valuations. But, IMHO, the folks who march to the beat of their own drum, whether they’re hot or not, are the folks who create the most lasting value.

  3. harryh

    Talented engineers are much more scarce than capital so engineering salaries are up as well as the capital raises needed to pay those salaries.

    1. Gotham Gal

      that will change sooner than later as more kids are graduating with CS degrees, more STEM programs are being taught from early education and onward. I do not agree it that is about those salaries. It is much more than that.

      1. harryh

        Sure, it’s not just about salaries. It’s also about capital being super cheap right now. The world is awash in money waiting to be invested. Investors are much more willing to invest more money than lower their equity stake though the latter does seem to be happening more which is nice to see.

      2. Meredith Finkelstein/Chang

        There are a bunch of great developers kicking around from web 1.0 that lack the pedigree & network but are amazing. Capital IS cheap – and in this funding environment, people may not deploy capital effectively and just pay higher prices (for everything) – so you just have to work harder to find value (for everything people/rent etc)

    2. pointsnfigures

      Yes, but they still have to sell it. Agree with Joanne in that the market for engineers is good now. In 1984 when I graduated all my room mate engineers couldn’t get jobs. I had 3 offers. Things will change.

  4. Matt Kruza

    Sure valuations seem crazy (and I think long-term answer to this issue is revenue based financing to solve the fundamental misalignmens between angels/VCs and founder outcomes.. happy to give details if interested on my future vision for this instrument), but here are three factors that I think explain it: 1. Outliers produce all the economics: As Marc Andreesen says 15-20 companies will makeup 95% of the economics of any fund year. With a few 100k angel investments and a few thousand VC deals each year basically that means only 1-2% if that of companies really matter if you go the “venture route” (another reason I think VC is inherently broken). So basically everyone competes thinking they need to get into that 1-2% of companies, and thus supply/demand is in favor of that entrepreneur. 2. All (ok, most) the startups are in absurdly high cost locations, which for now are only getting more expensive.. making big rounds more necessary (or you can move to the Midwest, bootstrap a real company… hmm..might know someone doing that..) 3. Venture and angel money is SUCH a small part of the financial ecosystem and as returns are decreased elsewhere people will fly to the “hot investment” that has the chance for insane growth. US overall equities (not even debt) are around $20-25 trillion. VCs manage less than $250 billion, and lets generously say angels have as much capital to invest. $500B is less than 2% of all equity (used as proxy for risk capital here) funds, so there is much room for it to get higher.

    1. Gotham Gal

      Creating high valuations around theory number one is correct but not a reason to throw cash into the wind

      1. Matt Kruza

        I guess the point is tho that it isn’t into the wind is it? I mean, I think either you have to decide: 1) This is a nice $10-$25 million exit within the next decade and will in total raise less than $1-3 million and be more life-style, or 2) we are playing a modified lottery, and are going for the billion exit or heaven for gosh a “lowly” $100MM, and if so price is not really important as just being in the deal…

      2. Matt Kruza

        The VC game (what I will define as going for $100MM+ type companies inunder 7 years) is basically become and will remain a “high-price lottery” for all but those who have preferential access (ie the Jason Calcanis, Chris sacca, Ron Conway’s, Y-combinators, possibly you and then the tier 1 VCs like KPCB, Sequoia, ANZ, your husband’s USV firm etc.). Whether or good or bad, this is the reality going forward. I need to make a detailed guest post on this somewhere because it is the macro economics of VC that almost no one is talking about.

    2. JLM

      .These investments are “startups” and, as such, have no revenue or reliable revenue projections. At the seed stage, this is an emotional investment which is based on “jockey, horse, course” and always will be.As to the unicorns driving returns, that is a factor of the high failure rate of VC funded startups. The failure rates are 75% +/- which means the remaining investments are outliers by default.The supply of institutional money — insurance companies managing pension money and pension funds — has a very small allocation to VC in much the same way they had small allocations to real estate 25-30 years ago.The inability to predict returns in the VC space means it will always be a 2-4% allocation in a big fund which needs predictable returns to be able to pay pensions which are almost perfectly predictable.Real estate overcame this allocation model problem by being dialed in for return contributions 20-30 years in the future and the fact that real estate returns never go to zero.VC returns can go to zero.The other big problem for pension funds and other LPs is the inability to attract and retain world class talent. This has always been a problem when funds are part of a general services type compensation scheme.A handful of endowments and funds (UTIMCO being an example) have been able to spin out their management and to attract world class talent.It is a problem looking for a solution that is not very attractive when equity markets are on the roll they’ve been on recently.JLMwww.themusingsofthebigredca…

      1. Matt Kruza

        Many good points made here. The revenue financing would be made on projection of future revenue.. removes the valuation incentive mismatch which currently exists.. and also will force companies to get revenue. with as little as $500k you can start to raise 50% of ARR even as it exists.. and will improve in future. I have a much more evolved and complicated (yet realistic) vision, but here is one such company 100% in existence https://www.lightercapital…. Just to clarify your last comment.. “it is a problem looking for a solution?”.. do you mean venture capital in general.. or? And lastly, hugely agree that returns are distorting since 75%+ of firms don’t survive long-term.. many forget this and this changes the conversation in many ways, frankly making it an unappealing asset class except for the “lottery” chance of a mega 5x type fund (those who funded ebay.. yahoo.. paypal.. facebook.. twitter etc)

        1. JLM

          .In startup world there is no rational basis for making a revenue projection. It is a freakin’ startup. Revenue projections are crap.The seed money is intended to test the hypothesis not to capitalize upon a revenue model. The revenue model is still being developed.This is why the vast majority of seed takes on the structure of a convertible note — convertible with a discount at the first time that a priced (pre-money value) round can be made rationally.Bootstrappping, F & F, Angels, some syndicated Angels and some Seed investors are emotional investors because there is no “rational” basis for projecting value.Other investors are “rational” investors but only when there are some numbers that are meaningful.Not really a close call at all.JLMwww.themusingsofthebigredca…

          1. Matt Kruza

            Well the big difference with revenue based financing is it provides a non-m&A and IPO path for investors to accumulate significant money if the startup succeeds. If you raised $500k on a convertible and the company is successful early you as an investor is screwed.. many convertibles have a path to being callable and being paid back some paltry 8% or so.. basic point is there are many companies who can raise $250k-1M and get profitable.. or only need additional debt or revenue based financing.. will show you how its done as my company progesses (and progesses to 9 figures value.. not talking about little companies here). Basically VC only allows for “go big or go home”.. as marc andreesen recently went on a tirade about.. at least he is honest that is the only option. But, that is unsustainable or at least non-ideal I would offer up in all but biotech and “winner take all markets”. Markets that require time to develop are often GROSSLY distorted when the company only has “go big or go home options”… and VCs hav incentives have big funds because of the obscene 2% management fees. no harder to manage 1billion than 100 million (surely not 10x), so VCs are massively incented to increase money managed and invested although there is little underlying sense

          2. JLM

            .Matt, you have a flawed understanding of convertible notes. Remember that convertible notes are a tool designed by investors to protect their interest when they cannot put an accurate “pre-money” value on a priced investment.They are specifically designed to prevent much of what you suggest might happen.First, a convertible note holder (investor) typically has the right to exercise his option to convert to equity while a note maker (entrepreneur) will typically have a period of time in which he cannot repay the note as well as an obligation to provide notice and the passage of a specific time period in which to repay the note.There are no temporal Pearl Harbors.BTW, I have never seen a convertible note that didn’t have to be re-negotiated during its lifetime. So, the entrepreneur has to maintain a working relationship in order to be able to create goodwill to be used on this front.In this manner, if an entrepreneur comes into a lot of money from say operations (which he would be required to report to the note holders as part of the reporting regimen required by the terms of the note), the note holders will be inclined to convert into equity.In startups, there are no useful revenue projections. Period. They have no products, they have no MPFit, they are startups.Investors and entrepreneurs have a symbiotic relationship. An entrepreneur who takes liberties with an investor likely forecloses himself from tapping that pool of capital ever again and VCs — subsequent funders — are quite solicitous and interested in the working relationship between earlier investors and the company/entrepreneurs.The money game is ultimately built on trust.Your assertions about the character of fees is amateurish and uninformed. It is only the quality of the management and their vision that separates the mediocre and the most successful VC firms. That quality does not come cheap.The comparison between billion dollar firms and hundred million dollar firms is an error of composition unless you are able to carefully compare the investment thesis of those two firms.As an example, one may be engaged in seed funding and the other in a more capital intensive A/B/C/D program. Industry focus is also important.Bigger enterprises (investments) require different expertise and a bigger firm whose exit is an IPO may have an entirely different menu of capabilities.Even at the angel level, different investors bring different capabilities and in some instances their capabilities and contacts dwarf the value of their money.JLMwww.themusingsofthebigredca…

          3. Matt Kruza

            Definitely don’t agree on the VC firm side, but we can disagree. On the convertible side many are priced on a certain discount to next round or with a cap correct? So if there is no next round how can they convert to equity? Is it typical that the note is just converted at that cap even if there is no next round? Genuinely asking. In Ohio there have been quasi – govt. $250k notes that only convert upon next raise, so you could just pay them back and they would be screwed. So curious how a more industry typical one works. Would assume if say the cap is $10M then they can convert at $10M if the startup never needs to raise from the outside again.

          4. JLM

            .A promissory note has a principal amount, a term, an interest rate, an amortization schedule, perhaps a guaranty, collateral (sometimes) and terms and conditions.The terms and conditions would include the conversion provisions — which are typically exercisable at any time by a note holder (investor).When there is no subsequent capital raise, then the term controls the maturity of the note and is due and payable upon expiration of the term.If the borrower is unable to repay it, then the company can be forced into bankruptcy proceedings.A creditor is first in line before the equity holders and this is one of the reasons why convertible debt is often attractive. It is a priority in a liquidation.This is true of any promissory note.As to their being repaid, that is a very rare occurrence if you think about it clearly. If it is able to be repaid then the company is likely highly successful which implies they should have no trouble raising money.This is typically covered in the terms and conditions of the note from the outset. People didn’t start using convertible notes last week.JLMwww.themusingsofthebigredca…

          5. Matt Kruza

            Right. But like you said before special terms being put in they may simply only have the right to get principal and interest after say 36 – 48 months.. I have seen this in two notes (now both were sub $100k) I reviewed for some friends.. now the deals ended up not reallymaking sense for them.. but I guess my original point is that while not the norm, if a startup takes a convertible note and goes crazy they can cash the note holder out.. which IS NOT ideal or fair.. I guess I am just saying that there are startups that can go big on say $250k – $1M but do need some of that risk capital, and revenue financing is a hybrid model that can work in the future. It has been done on oil exploration for 100 years, and a startup is almost like drilling an oil well right? I mean there are many zeroes, but there are some huge hits. Just trying to show you that I have done my homework and also trying to show you the future! (or at least one of the future financing vehicles). Won’t totally replace VC rounds or traditional convertibles, but for many SAAS will make sense is my assertion. I guess one of us will be buying the other an ice cream sundae with the reuben from our real estate bet 🙂

          6. JLM

            .The notes you describe are hopelessly amateurish and unrealistic. Investors are not stupid.Again, you are disconnected from reality. If the company can pay the notes at maturity, then they have likely done well. The had to generate this money somehow.The note holders (investors) are going to convert.If you want to see what some real convertible notes look like, go to crowdfunding sites and click through to the deal docs. You can see what a real convertible note looks like for a startup deal. This is the real world.Oil wells are not even remotely like startups.An oil deal relies on some sense of geology or “creekology” which sets the risk profile as to whether there might be oil under that bit. Most oil deals are repaid in 28 months and are development (new wells in existing fields) deals.You’re going to have to get over this silly notion that revenue projections drive funding in startups. That is just not so.If you want to gaze at your navel and consider alternative funding mechanisms consider crowdfunding, Reg A deals (big news in the last 24 hours) and Reg D deals.Much of this is JOBS Act driven and there are some new techniques to be developed but revenue based lending or investing is not a reality for startups.You do know that your generation did not invent either finance or sex, right?JLMwww.themusingsofthebigredca…

          7. Matt Kruza

            🙂 you will have a special chapter in my biography.

          8. Catherine Dacules

            “The money game is ultimately built on trust.”Fully agree.

  5. jim forbes

    and what are the qualifications of people who run accelerators?how much real operations experience do they have? over the last 20 years, MBA factories have shifted their emphasis from running and growing companies to managing and growing wealth. Universities need to help thin the herd by making operations experience a mandatory requirement for selection, I believe.

    1. Gotham Gal

      Interesting thought

    2. Catherine Dacules

      This is the easy part. Whoever gets their costing right, explain it in plain terms, and generate reasonable profit forecasts out of it; should be the one who will get funded. Accountability over one’s figures should really come from a very well defined place. Can’t afford to be dramatic about it with too much optimism. The startup who wears their costs like badges is the real deal.

  6. lisa hickey

    Hi Joanne. I’d first like to agree with your main premise that really proving the model before going for the big check and the big valuation is critical for both entrepreneur and investor and seems like such a no-brainer that that is why there is such head-scratching going on. And I also agree accelerators and egos being a big part of it. I even wonder what role sexism has in this—is it mostly male founded/run companies going for the big valuations? Do you find the same trend among your women entrepreneurs? Or are women entrepreneurs working harder to prove the model first? There is this thing about privilege — think about what you call ego, where someone says– “I’m smart, I have a great product, I work even harder than the next guy. And there’s all this money to be had, so why shouldn’t I have it?” I know people don’t tend to call that privilege and systematic sexism, but a sense of entitlement is certainly part what drives sexism to continue.But that isn’t even the point I want to make. I want to tease out one part of what you said and try to understand it a little better, because I think it is even more important—-“The insane valuations that means that the next valuation will be bigger, the expectations are much higher and the exit needs to be bigger and bigger and bigger. “My question is—is there then a reasonable expectation that exits will be bigger and what is driving that? Because if there is the potential for bigger exits that are generally realistic, then maybe the bigger valuations are called for.So what are the trends that could drive bigger exits?For example, one of the aha’s for me that came out of a conversation on Fred’s blog was the idea that distribution networks for physical products and services could get easier and easier because of the rise of Uber, Lyft, Sidecar, etc. Distribution in the past was always a big hurdle, and now, with a dedicated network in place, that’s a game changer. Low cost distribution because of a network of drivers that anren’t employees. How will that change the business models of the future? I can see a path to bigger, quicker exits if previously big problems of growing companies suddenly got solved very efficiently.In recent years, there is no doubt that the “cost of entry” for building a business has got lower and lower. So it would be interesting to see if “path to exit” has likewise gotten easier and easier. I don’t see people talking about that as much. I would love to hear more discussion on paths to exit and how those are changing.

    1. Gotham Gal

      Some companies need more cash to scale and others don’t.I am seeing this insanity in both men and women

      1. lisa hickey

        That is good to know, thanks.

        1. lisa hickey

          I am actually really glad to hear that high valuations are just as prevalent with men and women entrepreneurs. I don’t know why that makes me feel better, but it does. The reason I asked was in part because I had remembered the Harvard Business School study which had said that the reason women don’t earn as much as men is because they don’t ask for it. And I was wondering if they didn’t ask for as much money when finding money for investing. I’m actually glad they do, even if it leads to crazy valuations. I didn’t mean to go off on a tangent, but gender dynamics fascinate me.

          1. Gotham Gal

            BTW…men are much much worse but again there are more of them in the tech space. At least in what I have seen.

  7. awaldstein

    The first number I use is founder equity honestly.I like to sit back, figure out approx how many rounds I might need and understand that I don’t want to give away more than 20% per round.The idea of the present value of future revenues is a great one but an idea, nonetheless, and more a guideline.At the end of the day its just sales raising money and a higher selling price is not always the smartest deal.

    1. Johnetta Hess

      I figure it as though I build and have small reserve and plan to fund the year with product every 45 days and nothing leaving the warehouse un less it is top shelf everything else is made in to oils. Never giving more then 25%.

    2. Catherine Dacules

      I have the same thinking. I never understood the accelerator valuations. How would it look on paper? Where would it fit in the books of accounts? I still go for sales revenue forecasts and reasonable contribution margin ratios to guide me with valuations and the length of time needed to get there.

      1. awaldstein

        You and I both.Of course this is relevant only where you have something to sell, not so for a freemium model where it revenue is the exhaust of the network not the glue that holds it together.

        1. Catherine Dacules

          Tricky. There’s always that bubble to burst.

          1. awaldstein

            yupbuilding a business sure ain’t simple!

  8. Darryl D.

    Fantastic post. Especially this comment “Who is pushing up these valuations? Accelerators and egos.” It seems the measure of success in the startup world is now how much capital you raise and your implied valuation, no longer how much market share, profitability, growth… The mindset has shifted to living off investor money vs generating a self-sustaining business.Both investors and entrepreneurs are to blame. Investors betting with other people’s money while earning their management fees and not wanting to miss out on another “Unicorn”. Entrepreneurs for focusing on building a product that appeals to investors, all for the glorious capital raise (eg. Fab pivoting away from a successful model).It’s refreshing to see creative investors pop up like indie.vc that focus on the sustainability of a company.There will always be a need for investors to fund companies that aren’t profitable or revenue generating, but these shouldn’t be the majority of transactions.

    1. Gotham Gal

      I want to be in it to build something not for a quickie.

  9. CedFunches

    Great post. The sad reality is that investors forget that most founders are still kids. And because of age they have little business experience. So what they learn at accelerators is mimicking other templates to get that fairytale hallway deal.They see some of their peers get funded with nothing more than an idea and that has a tremendous effect downstream. That becomes their model. “If you funded those a-clowns….well we are golden.” I’ve heard that exact phrase.The blame imo is a little on the investors. This crisis is a direct relationship to the small (closed) networks. Investing in the exact reruns of original ideas. Talk to other founders. Listen to them.They don’t even want your money half the time. Just a listening ear to show you what is happening outside of the Silicon Valley bubble.They just want to help investors stop giving anonymous chat apps $40M only to complain.Honestly don’t feel sorry for investors. Remember it’s a risk. right?Great post. Now following ya!

  10. Johnetta Hess

    I see people that think going for the pie in the sky is the way to build there business. I just don’t see it that way I see building the business to get the quality the product that is manageable and that we never have to sit on because the market is flooded.I intend on building a solid small business that I and a few experienced hard working people can manage. Then build it in stages so we don’t find our selves caught holding the bag and loosing everything.

  11. Mark Gavagan

    Not an easy problem.If you have conviction that you’re picking startups that will very likely be winners in large all-or-nothing scalable technology businesses, I guess it makes sense to live with the high valuations, get in on the ground floor with the ownership % you’re seeking, and work like crazy to help them succeed.Otherwise, you’ll be on the sidelines and miss something great.If the valuations and minimum ownership size mean you invest more capital into fewer deals per year, it might be good in forcing you to get even better at scrutinizing startups (IF you’re saying ‘no’ to more companies that ultimately are not winners, you won’t be “wasting” your time and money on them).

  12. Mark Gavagan

    On “something to be said for being scrappy with $750 and proving out the model before going in for the big check,” it makes a lot of sense, unless the funding market dries up.It’s easy for a company to spend too much and attempt too many non-core things when there’s a huge amount of capital in the bank.

  13. Stephan Froede

    May be I am conversative, but I think if you can proof that the idea works and has traction, and you got some understanding of the real needs of your market. Than you also should know quite exactly who much money you need to grow faster.Albeit bootstrapping is taking very long and is also hard, it has the huge advantage that you need to focus and you are forced to use your extremly limited ressources very well.As I was looking at the current YC batch, I was a bit disappointed. There was no really fancy und very ambitious ideas. May be I am too much biased for fancy groundbreaking technologies, but that is where value comes from.My impression is there is a lot money sitting idle and interest rates are low and negative. On the other side there is no technology trend visible “next big thing” who needs all this money.As an effect the money is desperatly looking for a place to work. Over supply of money against not enough demand/investment offerings.It seems that this is currently limited to the Silicon Valley, but since SV is representing ca 60% of the global startup market, it also matters to other markets.Like a VC desert called Germany:-) bootstrapping in Europe, yeah.So I am curious what happens next.As the new economy exploded, it had a very negative impact because it did hit the stock markets. So it remains to be seen what happens if something goes wrong now.

  14. Pete Morrison

    I think Fred’s comments in his interview with Mark Suster recently, regarding startups getting huge early rounds, was spot on. If you believe in your product, why would you want to give up a larger percent of the company early on, and get enough funding to last 3-4 years? Get enough for 1 year and then go for more at a higher valuation in the next round. I’m part of a startup that is at the tail end of F&F and are starting to look for our next round. I come from a business background, so maybe I am operating in a different head space, but we’re looking for enough to get us through the next 12-18 months, and equally (or more) important, we are looking for a funding partner that will also be a strong advisor.

    1. JLM

      .One reason is exactly what this blog post is about — a bit of a bubble. There may be no money at any price a year from today if the bubble pops.JLMwww.themusingsofthebigredca…

      1. Pete Morrison

        So you feel it’s partly coming from a scarcity mindset? I guess that may be true for the “app of the day” but I think there is always money for the right product. Granted, it will be much more difficult to get at.

        1. Gotham Gal

          It is part of the echo chamber right now…until it isn’t.

        2. JLM

          .Cycles are never rational. The pendulum goes too far in one direction and then too far in the other direction.The pendulum is moving.JLMwww.themusingsofthebigredca…

          1. Gotham Gal

            true true. never rational

        3. Catherine Dacules

          I guess we all know that there is always money for the right product with the right app vehicle. How many wise investor can see that without rocking the boat by aiming for a huge chunk of equity in the first round?

    2. Gotham Gal

      a funding partner who will be a strong advisor is more important than people realize.

      1. pointsnfigures


  15. pointsnfigures

    I agree with you. I guess we don’t have to invest either. We can walk. Our loss, but their loss too because at early stages you need some capital in the company that can mentor etc-as you pointed out in another comment. The other thing is that when the fishing in one fishing pond gets bad, or if everyone finds out about the spot, time to find a new fishing spot. Valuations on the coast have always been higher than where I live (Chicago). Early money has always been easier on the coasts than in the Midwest too. I do say something when I think it’s overvalued. Good entrepreneurs aren’t offended. It seems squishy, but preserving discipline, always being willing to walk away, and having certain standards for risk/reward pay off in the long run. Of course, it’s important to constantly re-examine themselves to see if they are right or the market is wrong. Or, perhaps they need to change to meet the market. In this case, I don’t think you are wrong.

  16. Steve Amara

    This is why I think the funding market stays relatively healthy in Europe, even in places like London where capital starts to flow from the U.S. Valuations are most of the time very reasonable and directly related to traction. At least that way, we can’t fool/screw our investors.

  17. Jennifer Tegan

    I agree completely (having made the mistake of investing at too high a pre-money once or twice) it does not serve anyone well to be too aggressive, too early. The value equation for an investor simply does not work to invest in a first round that is inflated – IMHO it just defers the pain of a more likely down valuation for the next round.

  18. PhilipSugar

    I look at it a bit more simply, from both sides. One side is I have an idea, talent, and have the time to work but have no money. The other is I have the money because I have talent and want to be involved in lots of ideas, but don’t have the time.Ok so where is the fair balance??? If I put up $1mm for 10% of post that means I pay for 10 people to implement their idea for a year, and if….if it works out, I get 10%????I don’t like that balance. I understand lower numbers and I get follow on rights, but even then I know in the case of great success, others will try to squeeze me out.