Valuation As A Scorecard

When you set out to build a great company, it’s hard to know how you are doing along the way. There does come a time when you know you’ve done it. Apple, Google, Facebook, Amazon, Salesforce, Tesla, etc got there. We know that. And the founders of those companies know that too.

But two years in, three years in, four years in, it’s hard to know how you are doing. The market moves quickly. Customers are fickle. Competition emerges. Trusted team members leave. Your investors flake out on you. And so on and so forth.

So entrepreneurs want something they can hang on to. They wants a scorecard. A number. Validation that they are getting there.

And that thing is often valuation. If the “market” says you are now worth $1bn versus $500mm a year ago and $200mm two years ago and $50mm three years ago, then you are making good progress. The numbers tell you so. And it feels good.

Valuation can also be used to compare how you are doing against your friends. Your YC classmate got $100mm and you got $200mm. You are doing twice as well as she is. That feels good, at least it feels good to you.

Valuation is an entrepreneur’s scorecard. It has always been this way in startup land, but it is even more so these days when financings and the valuations are reported every day as the most important news items in the tech blogs. Tech blogs are the stock ticker of startup land. And entrepreneurs and everyone else around them watch the ticker waiting for the next “unicorn” to be printed.

I hate the word unicorn. It’s using fantasy to describe something very much reality. But I don’t want to digress from the larger point I’m making to go down the unicorn rat hole. Just please don’t use that word around me. I will likely throw up and that won’t be pleasant.

This obsession with valuation as the thing that tells you and the world how you are doing has a dark side. And that is because valuation is just a number. Unless you sell your business for cash at that price, valuation is just a theoretical value on your company. And it can change. Or you can get stuck there trying to justify it year after year all the while doing massive surgery to your cap table to sustain it.

And the markets can move on you and one day you are worth $2bn and the next day your are worth $500mm. Did you just mess up by 75%? No. The market moved on you.

The message of this post is don’t let yourself get sucked into a world where a number is your measure of self worth. Because you don’t control that number. The market does. And some days the market is your friend and other days it is most decidedly not your friend.

Measure yourself on whether your employees are happy. Measure yourself on whether your customers are happy. Measure yourself on how much free cash flow your business is generating. Measure yourself on how your brand is known and appreciated around the world. Measure yourself on how your spouse and children feel about you when you come home from work each day. You control all of those things, at least to some degree.

But please don’t measure yourself on valuation. It might make you feel good today. But it won’t make you feel good every day.


Comments (Archived):

  1. David Barnes

    I don’t know what inspired this post but it made me think of Twitter. Twitter got valued too high for its own good. It’s almost impossible now for it keep customers, users, employees, founders and the markets happy and ends up disappointing them all.I guess every founder wants to sell the smallest share for the largest amount, but is this always the right thing to do? Doesn’t it just create a rod for the founder’s back?

    1. fredwilson

      i don’t agree about Twitter. i think it is valued fairly right now in the public markets. this post is not about Twitter.

      1. David Barnes


      2. Cory Robertson

        Twitter is overvalued, thanks to FB.Twitter does not make money like FB.Twitter does not have an infrastructure platform like FBTwitter users are tourists, FB users are an audienceTwitter has no identity, FB has several identities to create moneyTwitter is an SMS to the web that no one really cares, FB touched the hearts of millionsStill the valuation of Twitter is expensive than FB, GOOG.God save Twitter for what it is going to be worth in 6 months, a fourth of current value

        1. fredwilson

          i appreciate your advice. but i do not agree with it.fb has never touched my heart oncetwitter does every single daydifferent services appeal to different people

  2. Peng Jin

    Valuation is the byproduct of value creation. Although it could derail every now and then, convergence should be expected in the long run. I find customer engagement metrics much more interesting and exciting to look at than valuation in a term sheet.

    1. jschless

      agree… tales of investing in core business success vs. arbitrary (somewhat) auction-like investment rounds .

  3. awaldstein

    We need capital, in fact while it takes less to start a company today it takes more to build it to true momentum.Valuation to me is all about my ownership stake and how much it costs me to get the capital.That’s not vanity simply the cost of money.

    1. fredwilson

      if only everyone approached it that wayvaluation is the exhaust fumes of the relationship between capital/runway and the dilution you take to get it

      1. LE

        The reason that it matters to people is because it’s the thing that is written about and allows people to easily understand and comprehend as opposed to a diverse set of circumstances that can’t be reduced to a sound bite or single thought. A number is the ultimate soundbite. So is a ranking or a size.Numbers, rankings, size and so on have always mattered and that is not anything that is going to change at least in our lifetime.

        1. awaldstein

          If you are a company with products and customers, your valuation matters not at all to the market of users.Does 1% of the people who use Uber give a shit about Uber the company? Not at all.True for Twitter, Facebook, ZipCar and any broadbased consumer platform.What TechCrunch publishes is simply irrelevant to the market unless you are playing only within that circle.

          1. LE

            Does 1% of the people who use Uber give a shit about Uber the company? Not at all.Agree. But they heard of it (in part) because Uber gets press, both positive and negative. Press won’t keep a customer but it gets you customers you can’t dispute that.your valuation matters not at all to the market of users.However press sells product and having a large valuation helps to get you press.What TechCrunch publishes is simply irrelevant to the market Agree with TC relative to end users of a product as a general rule. But being mentioned in TC does has benefits just like Luli being mentioned in a food industry trade publication has benefits. When I was in the printing business I read all the trade mags at the time. So when a salesman came in to sell me a machine and told me “Pearl Pressman Liberty uses our machine” I knew they were a player (because I had heard of them, same way I know “Union Square” as a neighborhood “positive association”) and that mattered to me and helped me make a decision (by halo) to consider what was being sold. Human behavior hard to escape.

          2. awaldstein

            In NY in the earlier day with Uber, partnership agreements was what worked.People–people that is not in tech- were given ecoupons attached to just about every event I attended in NY, SF and LA.Once it was on my phone, account set up, a decent experience, it was done.Smart.

          3. LE

            People–people that is not in tech- were given ecoupons attached to just about every event I attended in NY, SF and LA.Back in the 80’s that was known as “guerilla marketing” essentially anything that wasn’t traditional and could be done relatively low budget.In short: “Investing energy instead of money”

          4. ShanaC

            If you expand based on valuation and not cash flow, you could bankrupt yourself

          5. awaldstein

            How is that possible Shana?

          6. ShanaC

            See, Boom 1.0

          7. JLM

            .Most consumers never know anything about the company that provides a product that they use regularly. It isn’t required to make the product work.A huge number of young folk can’t identify the VP of the US but they can use Uber.Consumers are loyal to products, not companies that make products.JLMwww.themusingsofthebigredca…

          8. awaldstein

            Very telling comment.Speaks to the dynamics of how we relate to brands.Speaks also to the power of capital and the cults of personalities behind that capital in the tech world especially. And the gap between the tech world around TechCrunch type events and the world of consumers that uses the products that trickle down from the marketplace of capital and personalities.

          9. JLM

            .Like a lot of things, I think we are placing undue premium on the issue of “brand” perhaps confusing the product with the brand.I can recognize the Golden Arches of McDonald’s but all I really think about is the quarter pounder with cheese.I do not rush into a McDonald’s because of the brand but rather for the quarter pounder with cheese.JLMwww.themusingsofthebigredca…

          10. awaldstein

            Heavily nuanced discussion.Bought a bunch of new clothes for my son’s wedding. All Armani–what drove me to Saks, was brand.Luli products, the most premium ones on the market. There are a slew of reason why people pay–the end result is a brand connection.One of my favorite topics. You learn by pondering it not by isolating it into a general truth.

          11. JLM

            .We may be stepping on our own toes. Your Armani example is the same as my McDonald’s example. You were after the content — the quarter pounder with cheese or the Armani suit — rather than the Golden Arches or Saks.You went “where” you could find the “what” you wanted.As to food products, after the initial contact, it is always the taste. No amount of branding is going to get me to put something in my mouth that doesn’t taste good.For the first taste, you may be attracted to a particular brand or taste arbiter but thereafter, it is all about the tongue and the taste.Not sure we are saying anything different and, as you say, it is a nuanced discussion.JLMwww.themusingsofthebigredca…

      2. LE

        if only everyone approached it that way”Everyone” or everybody would approach it that way if everyone else approached it that way but they don’t. Once people go down the slope of applauding or recognizing things like this there is no way to put the genie back in the bottle.Chance of lists of college rankings not mattering? Zilch. Chance of rolling back the importance of “unicorns”, close to zilch. Chance of adapting a term like “quasi unicorn”? Possible Since it gives the media and bloggers a wider range of material and a word to describe that range w/o lessening the impact of the original. [1] [2][1] US News did this by simply expanding their rankings to include sub rankings. So did (as only one example) Philly Magazine way before US News even did their list with “Best of Philly”.[2] Just read yet another story talking about Julian Robertson’s trainees that succeeded as “tiger cubs”. People love a good word, simply invent your own and watch it achieve a life of it’s own.

      3. Matt A. Myers

        I can only imagine Arnold aging like a fine wine – he has the time/experience behind him and a nuanced understanding of seemingly anything he puts his mind to. As I go through more time, 32 years now, I am learning to appreciate nuances and the importance of managing and allotting proper time and expectations to every situation I encounter. There is no rush, should be no rush. Deadlines are good, an artificial time pressure to get one’s drive going, however using say valuation, a single number that you really have no control over, is a dangerous game to give so much power to, to something external instead of internal belief and way of being. As I write this I’m sitting in Palo Alto, sitting at a picnic table in a backyard, sun is shining, Anastasia is across from me – and I’m feeling grateful, so grateful – and the success of I Live Yoga is irrelevant; I will be sad if it doesn’t succeed how I hope, I will be happy when specific plans blossom. I will measure myself on doing my best and on how kind I have been to others.

        1. awaldstein

          How very kind. Thank You!

      4. mhortense

        Very true, indeed. On this, Heidi Roizen wrote an excellent (albeit long) article about valuation and today’s general belief that venture cap is free money – available here

    2. JamesHRH

      An all time market status comment: momentum’s harder than ever.

    3. William Mougayar

      well said & adding fred’s comment, we have the perfect equation.

      1. awaldstein

        You’ve been very helpful in getting this simplified in my own mind so I thank you.We need equations from the entrepreneurs point of view so they (and us as makers and advisors) can lay it down simply.We all need capital. We will need more.Do the planning. Understand your dilution and understand that the valuation is nothing more than the cost of it.

        1. William Mougayar

          yup. it’s really about choosing a path to growth.Growth can come via direct customers that fund you really, and/or by funding your growth with dilutive capital (VC’s). Either way can lead to success, and both together is often a good mix, if done right.

        2. pointsnfigures

          Do the planning is key-so you understand your ownership stake. Then there are no surprises. Things might change in the future, but at least if you have a plan you can understand it.

          1. awaldstein

            And honestly, the plan defines the spend against the revenue and where they intersect in 12 months or so.What gets screwed up of course is both the revenue expectation and as often the increased spend to capitalize on new opps.Damn a crazy and wonderful way to make a living.

    4. Twain Twain

      “More to build it to true momentum” is particularly important at chasm leap.The blue-line may represent value but not in the traditional way we know it.The value peeks for the innovators at the beginning because they feel great (“Wow, look at how cool it is we’ve got freedom to innovate!”) which then plummets because then they realize they have to get down to the HARD SLOG of getting people to use their system.So they wonder if their exuberance was over-valuing the gains of freedom they initially felt.They stay in this steady state throughout the stage of Early Adopters and wonder when their equity will actually be worth something.Hope rises — hurrah! They survived the chasm and now the value is taking off.By the time they’ve been embraced by the Early Majority…they no longer think about value in the way they did before so stop tracking that version of it.

    5. LE

      while it takes less to start a company today it takes more to build it to true momentum.Why do you feel that it takes more today than in the past?

    6. ShanaC

      It seems valuations are not tied to cost of cash when inflation is close to 0

  4. Tom Labus

    Companies going public earlier but I don’t know if bankers will allow it without sky high valuations. Kinda trapped.

  5. William Mougayar

    If a startup is valued at say- ~$200M and their next competition is valued at $10B, I can see how this could be a vexing problem for said $200M startup.Re: “one day you are worth $2bn and the next day your are worth $500mm.”, what are some recent examples of that happening?

    1. JimHirshfield

      1. William Mougayar

        keep going …..(i think they went down to even lower)

        1. pointsnfigures

          Facebook in 2008 took a valuation hit. Not their business, purely external market driven

          1. William Mougayar

            ok, but a hit is not a “down and under” situation. they took a step back, but 10 forward subsequently. they had to flush some things out.but maybe fred is being forward looking and prescient in suggesting that there are current billion-dollar private valuations that are sitting on a house of cards.

          2. pointsnfigures

            I don’t think it takes a crystal ball to say valuations are a little off in several companies. At the same time, this isn’t just in the startup sector. With the credit markets being manipulated by central banks the way they are, and for as long as they have been, it’s pretty clear that there are bubbles in lots of different asset classes. Real Estate, many publicly traded companies, and other private assets. When this bubble pops it will be different. Don’t know when it will happen, what will cause it, or whom it will effect. Trying to figure out how to take advantage of it.Startups should keep their head down, build, and in most cases, generate revenue. Valuation will take care of itself.

        2. JimHirshfield

          Yes. Sold for $15MM.

    2. Nikhil Krishnan

      Livingsocial is another

  6. Twain Twain

    Value is about more than quant (prices, probabilities and percentages) — whether that’s some number for equity, engagement or exit.Value is also qualitative — how good your team feels about the work they do and why they do it even when the “s*** hits the fan”, how happy your customers are and why they’re prepared to stick with it even during tough times, how considerate your investors are when they help you during each milestone your team’s aiming towards, and more.Value is also very perceptual and personal.In banking, we saw examples of people not being able to tell the difference between the quant factors of value and the qualitative factors of value.The mortgage CDOs and the machines running those complex instruments SEEMED to be generating higher and higher valuations.However, were they valuable to global society in the qualitative sense? No.[Actually, I wrote internal papers arguing against building up those parts of the business — and against prop trading where the machines run, unsupervised — so when it all collapsed and the banks wrote off $ billions, I felt vindicated.]Yes, I HATE the word “unicorn” too. As a founder, it’s not useful to you tell your team, “We’re aiming to be a unicorn.”Any building “sandcastles in the air” / “pie in the sky” / “ivory tower” language is simply redundant.A team’s inspired by setting specific practical value parameters:(1.) We’re considerate towards our team, users, partners (we think with care).(2.) For client X, we’ll install N widgets by Z month-year and reduce operational inefficiencies in ABC by P%.(3.) What our competitors do isn’t our opportunity or responsibility. We’re focusing on these N “To Do’s” over the next Y months and delivering on our potential and value.(4.) When our users engage with us, their LOLs are what we measure.(5.) We are our own most valuable investors. How we conduct ourselves and the work we do will be the legacy we share — not just with the third parties who interact with us — but with the person(s) we become in 5 years, 10 years, 15 years…when we die.So regardless of whether “investors flake out” or fight our corner until we IPO/exit successfully, our core values in our head, hearts and soul will stay true.

  7. Twain Twain

    Value creation graphic.

    1. fredwilson


    2. JamesHRH

      Twain, Inc companies are almost all cash flow companies. It would be interesting to know what % of the 46,609 jobs pay more than $30,000.For sure though, those CEOs are impressive operators.

      1. karen_e

        What is the connection between a “cash flow company” and one that pays many people less than $30k — if I understand your take?

        1. JamesHRH

          A lot of retail & B2B service companies are CF based companies.CF based often means that job one was make a sale, not build a unique product experience.

      2. Twain Twain

        Thanks, James, you’re right.For sure, there’s a difference between book / accounting value and value that enables employees to not only pay their bills but provide comforts for their families.A salary can pay no more than $30,000 but the value of training that enables the employee to FEEL that they’re growing in their role and appreciated by the company can exceed that — quite apart from more standard benefits that employees may get (health insurance, company car, crêche, travel expenses, relocation costs and so on).There’s also the whole thing about what employees perceive to be a “fair value” salary & benefits matrix.Is a sales person more valuable than a HR person who cultivates the environment that enables the sales person to pull in those $million client contracts? How are those people values calculated?These are issues I’ve given some thought about over the years.In b-school and incubators they teach all sorts of valuation techniques that are all accounting-based.We’re taught less about people value, value to society and non-quant value.So maybe it’d be helpful to have frameworks around those?

  8. Phil Hayes-St Clair

    Perhaps also measure yourself by the number of people you employ?

    1. Rohan

      Whatsapp would disagree. 🙂

      1. Phil Hayes-St Clair

        Right you are 🙂

    2. JamesHRH

      Phil, measure success by whatever it is that you value.Its personal success after all.

    3. fredwilson

      Many value that and I know why. I am not in that camp but I appreciate people that are

  9. Dan Epstein

    Refreshing post. My first thoughts after hearing about billion dollar companies coming out of NYC was what a silly way to measure success.

    1. JamesHRH

      Dan, its a silly way to measure personal success. It is a pretty concrete way to measure startup success.

      1. Dan Epstein

        I’ll disagree. From the article I posted above regarding Secret shutting down:”More money flowed in. Secret raised $25 million from Index Ventures, Redpoint Ventures and others in July, giving it a valuation of more than $100 million.”Also in the article:”, a onetime e-commerce darling, was once valued at more than $1 billion and had raised more than $150 million before ending up in a fire sale this year, when it was bought for about $15 million.”

        1. JamesHRH

          I will clarify.VC based valuations are not concrete; CF ones are pretty concrete.I never bought the Fab or Secret success projections (easy to say now).There is a time when a Ferrari purchase is cool, but it is after your success is more concrete.

          1. pointsnfigures

            No doubt. I remember a trader that made a lot of money. Went out and bought a Porsche. Next week, had a bad day and was whining. We told him to sell the Porsche.

  10. victorpascucci3

    Great perspective!

  11. Rohan

    This is such an awesome post, thank you Fred.Applies to so many things beyond valuation as well – money, titles, etc.My takeaway on further reflection (via a blog post on my blog) is – be careful what you measure. Because, what you measure is what you optimize.. and the worst outcome is a life spent optimizing all the wrong things.

    1. ShanaC

      How do you know in many cases what’s the wrong thing is

      1. Rohan

        That’s a great question. I think it all comes down to the big question – how you will measure your life?(

  12. Dan Epstein

    Tangentially related. A few recent examples from the NYT last week…

  13. reece

    fuckin’ a right!

  14. JimHirshfield

    This post begs the bigger questions of what constitutes success and happiness. I know you hit on happiness, spouse, children. Those things are hard to measure and sometimes hard to control.

  15. JimHirshfield

    How about this fetid symptom of this false validation from high valuation:Google Ventures’ Bill Maris likens the $6M cash-out by founders of portfolio company Secret to a “bank heist” in interview

    1. JLM

      .Yes, only VCs should be allowed to make money on their investments.The fact that the founders created and own the company is irrelevant.Give the money back. Sell the Ferrari. Go back to Ramen noodles.Now.Lesson: You are always investing in the character of the jockey, not just the long legs of the horse.JLMwww.themusingsofthebigredca…

      1. Twain Twain

        “You are always investing in the character (and skill) of the jockey, not just the long (strong) legs of the horse” is a brilliant, brilliant observation.Thanks!

        1. pointsnfigures

          100% agree. At early stages bet on jockeys. Only VCs have the luxury of betting on horses. They have the cadre to change the jockey.

          1. Twain Twain

            Ah, but…….Sometimes the horse runs best with only one particular jockey, e.g. Steve Jobs and Apple, because their relationship generates symbiotic, synergistic value in ways that Wall St and investors can’t (yet) measure, qualitatively and quantitatively.

          2. pointsnfigures

            Yes, you are correct. Can’t tell that in the first round though.

  16. pointsnfigures

    This is a great post. But I think it’s a great post for reasons other than most might think. It’s a great post for mental health. Many traders (and entrepreneurs) get caught up in tying their self worth with their bottom line. What happens when the market moves against you? That’s when traders I knew took their life. The last paragraph is a place where we all should be.

  17. JLM

    .When you are at death’s door and have your hand on the door knob — slick as snot on a glass door knob — you will not be holding your personal financial statement in your other hand.You will not be calling for your lawyer or your banker or your tax accountant.You will be calling for your Momma.[Remember what this Sunday is, y’all!]JLMwww.themusingsofthebigredca…

    1. karen_e

      Over here, over thereIt’s the same everywhereA boy cries out for his mamaBefore he dies for his home-Billy Bragg

      1. JLM

        .The stories I could tell you.JLMwww.themusingsofthebigredca…

      2. BillMcNeely

        True in any language

    2. Charlie Crystle

      until then, get back to work

      1. JLM

        .Stronger than an acre of garlic!Rosebud!JLMwww.themusingsofthebigredca…

  18. LIAD

    my initial comment amplified this sentiment as I agree with it wholeheartedly. I dislike feeling our industry is moving from one built on creativity and ingenuity to one based on financial machinations like wall st.however – looking at things pragmatically. i can take a valuation to the bank. i can leverage and exploit it. i can’t do that with – employees, spouse, kids happiness etc.turning up to a VC pitch meeting with “we have no idea on valuation, but my wife gives me a glorious smile when i get home each night” – will get me kicked out the building.but then again – “Be the change that you wish to see in the world”

    1. fredwilson

      It might work at USV

      1. LIAD

        Fucking awesome

    2. Vasudev Ram

      >turning up to a VC pitch meeting with “we have no idea on valuation, but my wife gives me a glorious smile when i get home each night” – will get me kicked out the building.The thing is, they don’t have to be mutually exclusive.

  19. Stockpulp

    Great post Fred and thanks again for selflessly sharing with us.

  20. William Mougayar

    What if the market/users valued a company, and not investors?It sounds paradoxical because we allow that in public markets, but not in private markets. Although we trust that private markets will be fair and lead in orderly fashion to to public markets, as you pointed out on Monday, this isn’t happening too well at the high end of the spectrum, because the quantitative valuation thinking goes out of the door.

  21. JamesHRH

    Self worth should never be tied to a metric that is controlled by other people.It is why athletes focus on process, not outcomes: that way, they detach the result (which they cannot fully control) from their effort.Best ever recent personal example, Vancouver Olympics, CDN moguls skier Alexandre Bilodeau is a huge favourite and then runs a flawless run. In post-run interview, he is asked about state of mind at top of run. His answer, basically:’ I thought about all of the work and sacrifice of the last 4 years, not going out to have fun with friends. etc…….I said to myself that I would do all of it again and that I had no regrets, no matter what happens.”And, while I am not moguls guru, moguls seems like one of those sports where speed meets precision and little mistakes cost you gold medals –

    1. Chimpwithcans

      Good analogy. This is key to a good golf shot too. All process, faith in your ability and preparation and the result goes where it goes regardless. I have not found a way to factor this into my working life yet – Maybe that’s cos I find golf a lot more fun to work on 🙂

  22. Chimpwithcans

    On the topic of Unicorns (Fred pls don’t vomit) – they do really exist and you should make sure your child gets to see one:

  23. jerrycolonna

    In my experience as a coach for entrepreneurs, the most difficult days are the days after some big name company gets some huge valuation (“No profit! $40 billion valuation!”). Clients come in and feel like shit because their last valuation was “only” $900 million.In fact, I was just working with some whose company raised $150 million at a $900 million pre-money valuation and the CEO was upset, concerned that they would have difficult attracting talent because they weren’t a “pre-money Unicorn.”God help us.Do investors make this harder, though, by marking to market their holdings? I suspect so. Fears about raising additional funds can, at times, drive investors to push for higher and higher valuations–valuations which may be disconnected from the underlying value of the business.I always liked this quote from Warren Buffet:”The big question about how people behave is whetherthey’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with anInner Scorecard. I always pose it this way, I say: “Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? Now that is an interesting question.”

    1. Charlie Crystle

      If pre-money unicorn status were so important to that CEO, he could have achieved it through other terms that offset the increase.Unicorn status can be a marketing tool, though: the company will get unearned press mentions more often.

    2. pointsnfigures

      Part of the problem for investors is valuation is about the only metric you can show to LPs that prove you know what the hell you are doing.

      1. mike

        I disagree. Any LP that has been through a few economic cycles understands that it’s all about cash on cash returns, not FMVs.

    3. JLM

      .Years ago when I founded what would become my first “big” company, my partner and I sat down and posed the question:”If we’re really successful what will that look like?”We were a perfect fit and in 12 years, we had a single disagreement that we solved in one day.I wrote down our answers and put them in an envelope and filed away the envelope. A few years later, I found the envelope and read it.We had crushed our expectations. I couldn’t recognize my own hand writing — which was a very important bit of symbolism as I couldn’t recognize myself. I had grown a lot while building the company.I began this practice — on a personal basis — and did it every time I founded a new company and each year as part of the annual plan.What it did for me was keep me grounded and let me know when I had outrun my coverage. It kept me humble because my initial expectations were so, comparatively, modest. Still, they were very aggressive expectations.In life, we have to be true to ourselves. You can’t let a little success change you in such a way that a good outcome is not “good” enough.You can only eat so many tacos.JLMwww.themusingsofthebigredca…

      1. jerrycolonna

        I love that practice. You explicitly put yourself on a course of listening to the inner scorecard. That’s one of the best survival tools I know.

        1. LE

          Otoh having a scorecard also sets you up for disappointment if you don’t meet the goal (if I understand the concept being discussed here). I go by a “try as hard as I can everyday” and always have w/o respect to any “goal”. In fact I deliberately don’t and have never obsessed with numbers or goals of any sort. I would never even come close to someone who would answer a question like “where do you want to be in 10 years?”. To me hard work is the answer I don’t need more than that thought.I was never obsessed with paying for my kids college when they were born or at any time after that. Just worked hard as I could everyday (and still do because it’s just the way that I am). Didn’t even care about any tax type college savings plan or similar . Was a distraction. Did know that I only wanted 2 kids though but could hold that in memory didn’t need to write it down.

          1. JLM

            .Nah, there is a difference between running the low hurdles and the high hurdles.In life, you have to set your own hurdles.Even if you catch your heel, you catch it on the high hurdle.JLMwww.themusingsofthebigredca…

          2. Joe Cardillo

            I think the scorecard metaphor sort of hangs us on the idea of numbers, and I agree with you about the 10 years goal. My experience with the inner scorecard / bigger picture thing is that it’s that 2nd to last paragraph where Fred really nailed it. If we have goals that align with ways of being for ourselves and our companies (nice focus on that from JLM and Jerry too) then we’ll be able to listen to, welcome, and have a sense of humor about the more literal scores (are we making enough $ etc).But I think that’s nicely illustrated by your point, it’s the hard work that matters. Right at this moment I am sitting in a chair in a hospital next to my friend who is about to find out what comes after this. The work is always there for us if we want to do it, and that’s a scorecard that matters infinitely more.

    4. fredwilson

      God help us indeed

    5. ErikSchwartz

      “concerned that they would have difficult attracting talent because they weren’t a “pre-money Unicorn.””Long time and many time startup employee (and periodic founder) pro-tip:If the valuation has already gone through the roof you may well be too late. The time to go work for a start up is when the valuation is low. Buy low, sell high is much better than buy high, sell high.High private market valuation is BAD for new common share or option holders.

      1. fredwilson


      2. jschless

        that is the difference between making a ‘trade’ and an ‘investment’

    6. mike

      Makes no sense for job-seekers to seek unicorns or valuations. I would be looking for the lowest valuation company with the greatest upside in order to maximize my stock-based returns.

    7. Matt A. Myers

      Outer Scorecard would be driven by ego and/or fear?

    8. Sam

      On attracting talent, that’s a shame if “finding a pre-money unicorn” is driving job decisions that fundamentally. My personal model for any job decision, adapted heavily from Jim Collins’s hedgehog concept, is to find the intersection of: 1. A functional role you are best at doing, 2. A company and team you are passionate about (boss, co-workers, culture), 3. Something that maximizes your economic value. And of those 3, finding the sweet spot between 1 and 2 is critical. Applying a filter on 3 is fine, and everyone has to figure out how much they want to chase the money. But looking for “the next unicorn” as their primary filter? That’s a recipe for heartache.

    9. Richard

      Mendacity is lethal.

    10. PhilipSugar

      I view it this way:If you rate yourself on an outer scorecard: somebody is always better than you:Period. More money, better looking, whatever.Then you find people that if your rate yourself on an outer scorecard, they are much worse off than you same things, Period: But they are happier, have better relationships, etc.So what is important????

    11. Vasudev Ram

      Nowadays for a lot of people in the startup world, it seems to be more about form than substance.

  24. Charlie Crystle

    You hate the word unicorn yet your examples are all very high approaching-unicorn-status valuations.Most funded companies will never break a $30 million post.

  25. Jc_mellinger

    This is AVC gold…And that is because valuation is just a number. Unless you sell your business for cash at that price, valuation is just a theoretical value on your company. And it can change. Or you can get stuck there trying to justify it year after year all the while doing massive surgery to your cap table to sustain it…”

  26. James Ferguson @kWIQly

    If you are happy to produce something that people want or need, that does no harm, then you can create wealth.Accumulating money is a mechanism to help guess whether you are creating wealtha) Its traded on the margin (so does not represent the average)b) Its traded on futures (so it is at best an approximation)c) It is not the last word.If you create enough wealth – you need not worry about the money. If you don’t worrying about the money does not address your problem.Focus on creating wealth as defined above !

  27. Nigel Sharp

    Well said Fred.

  28. Steve Goldstein

    Great post. The problem with focusing on valuation is that you haven’t succeeded at one of the most important facets of being an entrepreneur – working for a someone (yourself) who knows what’s REALLY important.

    1. fredwilson


  29. ErikSchwartz

    I don’t have a comment other than wholehearted agreement.There’s lots of KPIs in any business to measure success. Valuation is not one of them.

    1. awaldstein

      Only really true KPI for product companies is revenue honestly.Startup revenue as the truest KPI

      1. ErikSchwartz

        Like I just tweeted”private market valuation is not a KPI one can use to manage a company. No correlation to anything operational.”Revenue is the gold standard. A KPI that directly correlates to revenue is almost as good. Managing operations to maximize private market value (especially in the current market) is fraught with peril.

  30. Bill

    Intellectually I completely agree with you. But I don’t think employees agree with you. Employees cannot process a private company stock price that goes down. Public company yes, private no. There are several companies that were highly valued but now likely are still highly valued but their next private round would be a down round. And the consequences will not be pretty on their employee base. They’ve already seen some spikes in attrition from those who can infer the valuation. Each of those companies are obsessing about what to do and there are no good answers.

  31. bfeld

    Easily one of the best posts written by anyone in a long time. Thanks for saying this so clearly.

    1. howardlindzon

      what about my comments? best in a while too?

      1. LE

        Or as Chevy Chase says – measure yourself by height.This made me think of what Alec Baldwin said “5 inches, but thick”.

    2. fredwilson

      Thanks Brad

  32. howardlindzon

    Say I was hunting with you and we actually saw a unicorn. would you throw up, run or shoot?

    1. JLM

      .No shit, you know how to hunt?I killed a unicorn once. Great tenderloins, nice smoked backstrap — the rest of it I had made into summer sausage ground with a nice fat javelina. The greasy pork gives it a little body and something for the spices to hang onto.Gave the horn to my black Lab who is still gnawing on it.Says she’s interested in a startup deal. Told her I wouldn’t invest with her because she’s too easy. Falls for anything. Plus her code is all over the place. No discipline.She took a dump in my office. Go figure! Might not be connected, who knows?JLMwww.themusingsofthebigredca…

    2. fredwilson

      Throw up then run

  33. howardlindzon

    When People ask I just say I am worth a shitpile. Maybe even more dead.

  34. howardlindzon

    Or as Chevy Chase says – measure yourself by height.

  35. Andy Rosenberg

    I hate the word unicorn, too, but applied it within the context of “startup marketing unicorns” in this previous Medium post. This is the most irritating word tossed around in this industry by far. Curious to get your thoughts on this perspective:

  36. Dara Albright

    Great article! Very refreshing perspective onvaluation from a VC. It reminds me of two contrasting companies I know of. Onecompany’s valuation “supposedly” quadrupled over thecourse of many years under the reigns of a very uncommunicative CEO, but it hasyet to provide investors with any liquidity. Another company’s stock hasn’tappreciated nearly as much but the CEO remains in weekly contact with his shareholders.When it came time for subsequent rounds, it was the responsive CEO who had thesupport of his shareholders and was able to raise capital fairly rapidly. Clearlyhis investors placed greater value on his integrity than his stock price.

  37. Kirsten Lambertsen

    So, build value, not valuation.

    1. fredwilson

      Shit. I could have saved a lot of time had I just written that!

    2. Chimpwithcans

      In the spirit of this comment, I am off to make a sandwich 🙂

  38. David Mandell

    Thank you for writing that.

  39. Nidhi M

    Fred I really liked your thoughts, I hope I will get an investor like you. But there are very few investors who understand entrepreneur’s vision, especially in India. And the vision is a long term thing, it can’t be finished within few months. It really hurts, when they tell us to make changes because of cash flow and income sheet.That cause good employees to leave a company and dispatch entrepreneur from a vision.

  40. LE

    Along the lines of the topic of the day “valuation” it is no surprise that some articles about the tragic death of Dave Goldberg mention both that he was married to Sheryl Sandberg and that his company was valued at 2 billion. [1][1] http://www.washingtonpost.c

  41. Nima Elyassi-Rad

    Too much noise in startup-land with everyone focused on private market valuation. The scorecard has to be whether we’re building a great business or not; one that solves a problem for someone somewhere.Want a great valuation? Build a great business (preferably one that doesn’t serve crispy tofu dog food to Palo Alto residents on Wednesday’s)Wu said it best

  42. JaredMermey

    1) Does the following statement apply to public companies too? “Unless you sell your business for cash at that price, valuation is just a theoretical value on your company”2) Is there a lot of financial engineering for companies valued in the billions? (e.g., guaranteed returns, multiples on preference, etc.) “Or you can get stuck there trying to justify it year after year all the while doing massive surgery to your cap table to sustain it.”

  43. hh

    Did USV get left out of the Zenefits $4.5B round?

    1. fredwilson

      We opted out. We may regret it. Our anti portfolio is shaping up better than our real one!

      1. Vasudev Ram

        What will happen when the two meet?

        1. ShanaC

          When the twain meet…

          1. Vasudev Ram

            I thought that form was only used in “never the twain shall meet”, as in “East is East, West is West, …”.Anyway, Twain Twain would like a word with you 🙂

      2. mike

        That’s aign of a great VC. Means you have access to great deals. Your anti list I’d imagine given your network-based strategy would be … airbnb, uber, instagram ..

        1. fredwilson

          we didn’t pass on instagram. we didn’t see it.

      3. ShanaC


      4. Dasher

        Is the valuation too rich for USV?

        1. fredwilson

          i’m not going to get into the details of our investment decisions in a public forum

          1. Dasher

            Perfectly understandable.

      5. ErikSchwartz

        My big question about Zenefits is how diverse is their list of customers? What percentage of their customer base is other very young, risky, venture backed start ups? What percentage of their customer base is more stable and established companies.If it’s a large percentage of the former they will be hurting badly if the fundraising environment changes and there a fewer new companies being created. It’s much easier for a product like this to get a newly formed, well funded company as a customer than to get an established company with existing benefits systems in place to switch. It’s also a totally different sales pitch.

  44. NicholeSmaglick

    Life, liberty and the pursuit of happiness. We in the West are great at the pursuit of happiness, but often don’t know the nature of what we seek. Thanks for this dose of sanity today.

  45. Travis Henry

    Awesome post. Not to mention (like you did yesterday) that this strains the transition to public markets as stocks trade below value.

  46. Liban Mahamed

    Fred;The trend and prominence of valuations is an indication a bubble is here. I disagree that today’s valuation are market based. It is insiders inflating their own stake with the hope of never ending supply of venture capital pouring in to cover losses.Most of today’s valuations in tech industry do not pass a basic test.Generate a return on capital.Remember firms that can’t make profits are wasting scarce capital. There is an opportunity cost here.The bartender just anounced the last call.I am heading to the door.Ladies and gentlemen the bubble is here and it will be ugly.I consider Amazon the worst offender.20 years, zero profits, a market value of 200 billion. This is beyond insanity. It defies all logic. When reality finally hits Amazon the stock price will lose at leat 95% of today’s value.One can not defy or ignore reality for ever.f fools n my view means

  47. LE

    Just please don’t use that word around me. I will likely throw up and that won’t be pleasant.I first threw up in the 90’s when I heard and continued to hear “eyeballs. In the 00’s when I started to repeatedly hear “headwinds”. And it’s been coming ever since.Newly hatched hear a phrase for the first time and think it has always been. Anyone who has been around knows it’s a new phrase and it becomes annoying when it is then repeated as if it’s legacy when it’s not.

  48. vinit_jain.90

    A indeed fantastic one. I also feel the same way that we shouldn’t let ourselves be caught in the same hackneyed phrase of market valuation and not to let ourselves feel down at least for the sake of just a number !!

  49. Jeff Pollock

    Just what Buffet says about liquid markets. One day Mr. Manic and the next day Mr. Depressive.

    1. Vasudev Ram

      Or one day Ms. Obsessive and the next day Ms. Compulsive 🙂

  50. Gareth Ochse

    I’m going to disagree here, Valuation is a great measure and a great scorecard.Let me explain: – I’m not talking about the price your shares trade at in public or private markets. This would appear to be what the ‘valuation’ talked about in this thread is about. This is vote by the market and I agree thats its irrelevant and distracting as a measure.- What I’m talking about the fundamental value of your business as an investment: the value of your future cash flows, discounted to today by a factor that accounts for the risk to capital provided to achieve them. This is a great measure and a great scorecard.Why? When you understand the free cash flows of a business you being to see what levers you can pull to drive them. How much does a reduction in COS boost your profits? What does a reduction in receivables do? Why is negotiating 1% off your cost of bank debt important? Why should you fly economy? How can you reduce risk by reducing your reliance on key suppliers, customers or expanding your product line?All of these things are levers you can pull. All of them influence cash flows or the risk to them. You can see which levers have more effect and prioritise them accordingly. You’ll quickly see which actions you can take now have the most effect on the fundamental valuation of your business in the long term.My view is that this is an exercise that should be done quarterly. We built to achieve just this (along with a lot of other financial benchmarking and strategy analysis). It’s not aimed at startups, nor companies that can access public capital markets. But for the other 99%, it’s a great management tool.

    1. Liban Mahamed

      You make a great point, your type of valuation is valid, fundamental analysis based on cash flow and revenue. My fear is today’s tech valuations are based on hype and insiders inflating value so they go public fast and dump the shares to unsuspecting public. It is almost fraud.

  51. Jenny Lawton

    Thanks Fred. This made me smile and is a great reminder. When your lens changes you interact differently in the world and make unexpected impact and change. Like it.

  52. Elie Seidman

    I read a thoughtful post the other day. James Altucher, I think. He has a good thought experiment. Paraphrasing here – ask yourself, “if you had a billion dollars, what would you do every day? not what would you have. What would you do! You have the jet, the house, the cars, etc. Now what do you” There’s a parallel here – the unicorn insanity is making the conversation about startups increasingly about the have, not the do. Yes, these are capitalist enterprises. Yes, the score matters – certainly to the endowments and pension funds who have important uses for the returns. But the intense focus on the (completely illiquid) valuation number is making the conversation more and more about the have, and less about the do. At the human level for those involved, it’s a rat hole. If the focus is on the have, it’s probably impossible to be satisfied. It a rat race that when won only makes you king rat. But the do can be deeply satisfying for the individual and greatly beneficial for society. A great return for the LPs is a wonderful byproduct. So it’s sad and disappointing to see so much focus and energy on the have – the number – at the very real cost of the focus on the do. I think it’s bad for our collective health and bad for the health of the individuals in it. It makes it harder for each of us to focus on the do when the system is ever more focused on the have. It’s a keeping up with the Jones but for startups. It was always there and will always be there. This is capitalism. But there is a middle ground. We’re not there.

  53. jukaks

    “how much free cash flow your business is generating” –> while your other recommendations are more qualitative/subjective, wouldn’t this just lead to a DCF to give your company an NPV – which is just another measure of “valuation”… whether or not that number matches your current valuation based on the most recent investment is another story (also obviously your discount rate and growth rate would hugely affect the npv)

  54. Jay Levy

    Great read Fred… There needs to be more emphasis in the community put on the right valuation for the business not the highest valuation. I fear if the markets slow down there will be many companies that need to raise in a down round situation which is going to make things really tough as I know we hate getting involved in down rounds as do many other investors.

  55. Dasher

    Nice post. Thanks for the advice. I think valuation should not be end all for entrepreneurs and VCs alike. Entrepreneurs should focus on building great companies and VCs should focus on investing in great companies, without obsessing on valuation.

  56. ShanaC

    Why is valuation tied to not cash (edit: not)

  57. Nick Budden

    We’re an SF company building our development team in Taiwan for a number of reasons, burn rate being one of them. Building a significant part of our team outside the U.S. we’re likely to take a hit to our valuation when we raise the next round, so I was thinking about this the other day.My conclusion was that despite taking a lower valuation at our next raise, we’re likely to get about 50% more runway due to the costs of doing development in Taiwan, for the same equity in our company. Founders shouldn’t see fundraising as a sale of their company’s equity for x-valuation, they should flip the equation and see fundraising as a purchase of runway for x-percentage of their company. When you flip the equation and look at the metric that matters, runway, you can measure success by what really matters to your company instead of what might matter to someone personally, which is inflating their ego with a big valuation in the headline of a techcrunch article. I see you’ve mentioned the same in your comments.Thanks for the post.

  58. mikeroth

    These high valuations are setting LPs up for disappointment, as well. VCs are valuing these companies at such a level that returns, if they are able to generate liquidity, are unlikely to be “venture-like”. The last few years have been characterized by a lack of investment discipline and an abundance of “me too” companies raising successive rounds. I expand on these issues in my most recent blog post.

  59. Prokofy

    The biggest take-home I got from your recent TV appearances was the comment about the discrepancy between the private market and the public market. This is a widening gulf that some think is a bubble.I don’t fully understand why private markets even exist. I don’t think they should be outlawed because if a bunch of rich guys want to trade around toys among themselves, why not? It’s their business and they will apply whatever valuation they need in that internal world, like a child valuing a Pokemon card on the playground. The external market might or might not play a role.But then the rest of us don’t have access to those cues, bits of information, social gestures, whatever it is that made up that differential in valuation. What a difference it would make if there were private markets, but transparent markets so that you knew who was doing the buying. This might have an alchemic role. I’m not sure it’s desirable but I wonder about it.Recently, I studied the list of all the people who own large numbers of Facebook shares. I suppose some of them — many of them? — had private shares before they had public shares. It’s interesting that Yury Milner got out.

  60. NotableSkeptic

    Is valuation a metric promulgated by entrepreneurs or investors?

  61. Karl Sjogren

    “Valuation is an entrepreneur’s scorecard” is an unfortunate truth with a conventional capital structure. If should be performance! That is, the better the performance, the greater the proportion of the wealth created should go to the entrepreneurial team.The Fairshare Model is a performance-based capital structure for raising venture capital via a public offering. I summarize it in a short abstract in competition for inclusion in the world’s first crowd-sourced book on FINTECH here…Draft chapters of my book-in-progress about the Fairshare Model are at The following is an excerpt from chapter ten, The Tao of the Fairshare Model:”The Fairshare Model differs from a conventional capital structure in how it deals with uncertainty. Uncertainty is inescapable when balancing ownership interests and performance risk. And it can be a struggle for a company and investors to find agreement on who bears the risks of uncertainty. Any agreement reflects an answer this question…Is it better to define the ownership interests of insiders before or after performance is delivered? Or, put another way…Who should bear the risk of uncertainty, should it be insiders (employees and existing investors) or should it be new investors?Those who believe that ownership interests should be set before performance isdelivered, that the uncertainty of future performance should be borne by newinvestors, will favor a conventional capital structure. They presume a Next Guywho is eager to assume the uncertainty at a higher valuation.Those who see benefit from defining ownership interests after performance is delivered or feel that the risk of uncertainty should be borne by insiders (employees and pre-IPOinvestors) will be intrigued by the Fairshare Model.The essential difference between the two is when the ownership split is decided—before or after performance is established.”

  62. dotzero

    Interesting post and thread. I find myself thinking about valuation from different perspectives.I’m an angel (accredited) investor and I clearly would like to get a return for my investment – valuation is how I ultimately measure it but I try not to get hung up on the ups and downs over the short term. I’m more interested in whether a solid company is being built and where things will stand at a logical exit point. I’m personally more inclined to let it ride if the company is doing what I consider the right things. I look at a lot of deals and scratch my head. There is a lot of money chasing investment opportunities these days and it seems to me that much of it is not what I would call smart money.I recently had someone I know approach me and tell me that he wanted to fund me doing a startup. I asked him what kind of (security) startup. He said he would leave that up to me as security is “hot” and I have a good reputation. I’ve thought about that offer but will probably decline. I’m flattered at the offer but in the context of valuation I’m not even sure I can figure a value proposition (kind of like a blind pool as far as I can tell).I have been considering doing a tech (security) startup for a while so I also think of valuation from the perspective of the tradeoffs I’ll personally make in both time and money I would put into a start up. I can (thankfully) afford to skip an angel round if choose but there is always the issue of risk (lack of) diversification.I’m not sure I would want investors who are very focused on valuation on a daily/short term basis. I’m would be more interested in investors who share “the vision” and agree on deliverables and time frames. These might be technical deliverables, # of customers, revenues, etc. These are metrics that (should) lead to sensible valuations but we all know that markets are not always sensible.There is always a context to “valuation”.

  63. Eyal Gura

    good advice ! wonder though, if we should also direct this recommendation to the VCs and how they report to their LPs on during the fund first 5 years ? perhaps this is what aligning the entrepreneurs to score around valuations as well ..

  64. awaldstein

    Sounds like a text book, not reality honestly to me.You need capital before you have created value. You need to sell that at a balance between reality and your willingness to dilute your stake.It’s always hard.

  65. William Mougayar

    Github was a good example of a company who quietly built value and didn’t let valuation get ahead of its actual work.

  66. awaldstein

    Of course.What I reject is this easy idea that you can build a team, create market pull and data and then just get capital by showing how it all fits together.This top down, investor centric view is a disservice to entrepreneurs.The easiest time to raise money is when you don’t need. At all other times it takes too much focus, causes too much pain and invariably you have to give away to much or take it from family.We all do it. The more pedigree and connections you have the easier it is. It’s never simple.

  67. JimHirshfield


  68. JimHirshfield

    One of the founders of Secret reportedly bought a Ferrari with some of that money. Employees didn’t know about it until they read it on….{wait for it}…. Secret. According to the article I read, he’s since sold the car.

  69. awaldstein

    Thanks.This is a good session. We all have something to take away from it to use.

  70. Charlie Crystle

    no you don’t, actually 🙂

  71. JLM

    .I am going to take a little issue with you, my friend.GDP is a very important metric to follow as it is a measure of productivity of an entire economy.I doubt it can be measured with the sensitivities economists want us to believe but it can be declining, flat or growing. We can probably get the overall direction right and sometimes, when it is particularly robust, a sense of its magnitude of growth or decline.Today in the US it is flat as a pancake.In the US, nobody is paying attention.I think we are slipping into another recession given no GDP growth, no job creation (folks forget we have to create a base line level of new jobs every month — about 120K — to absorb high school, college graduations and folks coming out of the military) and a fictitious unemployment meme built on the lowest labor force participation rate in a third of a century.It is worthy to note on the eve of a “hot” summer which seems to portend race riots in big cities, young black unemployment is at “revolution” levels. The Devil has no shortage of idle hands to put to work.Parting shot — the relationship between national debt and GDP is an important one. Past presidents justified deficit finance on an annual basis and total national debt because they were fairly small fractions of GDP (each in their own right).Now, that fiction is no longer palatable. National debt is eclipsing annual GDP and there is no reasonable end in sight — ever.What we measure, we manage.JLMwww.themusingsofthebigredca…