The Valuation Circle
When I look at the landscape of companies that have started in the past 12 years it is pretty amazing. There is literally not a vertical that has not been touched from software (Saas), CPG (consumer products), hard goods, media, fashion, beauty and more. It isn’t only technology but a different generation of consumers and how they live their life is different than the generations before them.
There is a cadence to raising capital for start-ups. First, there is friends and family, then there is pre-seed (which could be the friends and family round), then there is seed although sometimes you do a few seeds to get to the Series A, then Series B, Series C and perhaps a bridge loan somewhere in between.
As an angel investor who has invested in multiple verticals, I am well aware of how valuations differ based on the vertical because it is not about the entry, it is about the exit. For whatever reason, certain founders are insanely focused on high valuations from the get-go. Perhaps it makes them feel empowered that they have built something of that value. Whatever the reason, the key is how the company is valued from day one.
Investors who come in much later, the people who want to write that $25-50+million check don’t buy into dreams, they buy into reality. They understand that commerce companies, aka brands, are worth about 2 times earnings be it a sale or what they are valued in the public markets. Software companies are valued differently than CPG companies. Media companies are valued differently than Saas companies. Marketplaces are valued differently than all of them.
Yet I am still seeing early stage companies regardless of the vertical they are in, put out valuations that make them all look like pure technology companies, the ones that get the largest multiple upon exit. Many of the mature companies have gone out and gotten the big check to exit and the investors in the last few rounds have not made what they expected if anything. As more of the mature companies go out to get that big check, regardless of their solid growth, more of them are going to be seeing themselves in positions where they are either forced to sell at a discount or have a down round. That down round can have a trickle-down effect on every investor including the ones who put capital in the first round.
At what point are early institutional investors (and angels) going to push back on valuations that are out of whack so that the company is set up for success. I am seeing much later stage investors just shake their heads.
Be smart when you start as exits are valued at the true reality.
Comments (Archived):
There is no way to short-just keep your hands in your pockets and don’t invest. Takes discipline. For micro-funds, you will have to answer the question of why such and such a company isn’t on your tombstone. But, you aren’t treating LPs with respect if you put money in a company and don’t have a shot at a meaningful return.I wonder about a lot of the ICOs. Suppose you raise money and you are “theoretically” worth a huge number. What if you go through some of that money and need to raise an equity round of capital? Will your top line revenue support the theoretical valuation?Fund raising is a strategy, just like marketing.