The Valuation Obsession
There is an obsession with the values that are being placed on companies when they finance. There has always been one but it is worse than ever.
Every day, without fail, I read a headline that so and so company has raised, will raise, or is trying to raise capital at some eye popping valuation.
It would be easy to blame this on the media, which certainly has to shoulder some of the blame for believing that these are important stories to write day after day, week after week, month after month, year after year.
But the media writes what people want to read and talk about.
The problem is us, the tech sector, and the mindset that valuation is the scorecard by which we measure ourselves.
Of course, valuation matters. When GitHub exits to Microsoft for billions of dollars, that matters. It matters to Microsoft’s shareholders who paid that bill. It matters to Github founders and employees who got a pay day. It matters to the investors in GitHub who got a fantastic return on their investment. And it matters to Github users who got a signal about how important the software they are using is to the big tech companies.
You cannot cover that story without taking about the price that Microsoft paid. It is an important part of the narrative.
But interim valuations being put on startups is different. Sure the price that they can finance themselves is interesting. But not more interesting than the products and services they are bringing to market, how they are building their teams and cultures, and the underlying technologies they are using to do that.
And yet we get less and less of those stories and more and more box scores.
It leads to a culture of bragging and topping one another and an obsessive focus on valuation. I’ve heard founders say “if I don’t raise at a billion or more, we will be seen as a failure.” How ridiculous is that? And yet you can see how they can get to that place.
CEOs and their talent organizations frequently tell me that it is easier to recruit people to companies that have raised at eye popping values. This is particularly peverse because the higher the valuation, the less money the employee will make on their equity. But, it seems, the talent market is looking to the investment community to signal to them what companies are worth working for.
It should work the other way around. I like to invest in companies that smart people are joining. Capital should follow talent, not talent following capital.
I know that many will read this and roll their eyes. “Fred doesn’t like the hyper inflated valuation environment so he’s trying to pour cold water on it.” That’s true about me not liking it but we benefit from it as much as anyone.
What I don’t like about this environment is the focus on form over substance and reducing everything to a number. This could be the new normal. This may be life in startup land from now on. Maybe I just need to learn to deal with it.
But I hope not. I hope that people will come to understand that it is what underneath the covers that matters and the headline number is just that. A great way to get you to click on the link and see some ads.
Maybe someone could analysis this obsession through the frame of stakeholder analysis.Founders/Early Team Members/Potential Team Members/Recruiters/Journalists/Existing Investors/Potential Investors/Strategic Partners etc – I guess for many valuation/marquee investors are a very strong and honest signal for company potential and viability.When much of our lives have been reduced to 140char bites can we really expect proxies like this not to be front and centre?
blame it on twitter 🙂
Blame it on the Bossa Nova. By that I mean, you appear to be saying the latest dance craze is capital chasing valuations. As you’ve often said, founders need investors to who will stay and do the Two Step and not just get them to the dance. (try getting that tune out of your head the rest of the day)
Maybe Fred should start wearing cowboy boots.
Try visualizing that.
or a pair of these dancing down Wall Street;https://www.youtube.com/wat…
It was exactly the same 20 years ago: concept, + team w BigSuccessCo logo = stupid valuations on asinine ideas.Human nature is eternal, tools are ethereal.
So the price of rocket fuel just went up?Morgen.
Pattern recognition has replaced the desire to gain an intrinsic understanding of the matter at hand. I think this is playing out in everything from football politics to entrepreneurs who struggle to mutate their stories to fit the patterns that trigger many investors. We’re turning into processors. This is what I like about blockchain. Everyone starts out with a healthy respect for the glory of knowing nothing with an outcome determined by intellectual perseverance.
As I posted in my penultimate comment on this blog, Silicon Valley is becoming more and more like Hollywood.Whether it be popularly elected presidents, consumer sovereignty, or more generally “natural laws” popularized by the Enlightenment, they are all reminiscent of Korach’s call for egalitarianism: “Power to the People Man!”Moses was one man against Korach and his 250 followers. According to our rabbis Moses was right, even though he was vastly outnumberedOur rabbis hate Korach for being a rabble rouser. Jews are elitists. Our rabbis hate democracy. Tens of millions of Americans implicitly believe in democracy as inherently good. That is a dangerous error according to our rabbis because what is popular is, from the perspective of Halacha (Jewish law), all too often wicked.Yes. Jews believe in a theocracy which is primarily, but not entirely, based on one’s personal merit. The Sanhedrin which, in a nutshell, consists of 71 righteous and wise rabbis “calling many of the shots” (acting as the primarily judicial and legislative authority) along with a civil government (which is primarily concerned with maintaining national security which includes, of course, fighting wars), which could be a monarchy and eventually will be the Moshiach (the Messiah).America has been a country for less than 250 years. It’s “day in the sun” appears to be rapidly coming to an end just like, say, communism did roughly thirty years ago. Both were/are based on lies, er,uh, I mean false premises.“From each according to his ability, to each according to his needs” obviously violates human nature. In the same way, “One man, one vote” and “Free to be you and me” are obvious claptrap.The central government in the USA (and Western-style governments generally) is perched precipitously atop nonsensical concepts such as human equality and the efficacy of the popular will (the fickle will of the mob). By contrast, Judaism is based on the vastly more subtle and complex concept of justice which, yes, actually was carved in stone and rests solidly and implacably on the concept of Halacha (Jewish law).
Softbank & China plc changed the private members game…….Plenty of room at the table:http://www.imf.org/external…[The entrance of small machine quantum interoperability will open many new doors]
Valuation is the basic (and probably only) parameter to measure return/profit. Which is the most important value in a capitalistic world. As VCs make their professional lives by how much they return, it’s interesting that you are raising this issue. I wish we see important VCs who invest on companies that want to do good to the world, and not just return them gazillions of dollars.
I disagree. You can do “good” by investing in companies that return money. If a company or endeavor doesn’t make a profit it’s a hobby.
Right… there is no contradiction in doing good with making profits. But show me investments from top VCs were they gave a premium to a “doing-good” company over a company with big profit potential
doing good is very subjective. an oil company can be seen as doing good since they make it possible for goods to get to market and people to put gas in their tank and get to work. It’s one of the reasons I like the publicgood.com platform. Individuals decide what to support and who is doing good.
Thanks for sharing your thoughts on valuation. I’m happy to see my humble thoughts echoed here. Especially for young companies looking to raise funds, I feel that the focus on valuation makes no sense. The important things are the product and if the leadership team who are building the product and the company.
“Capital should follow talent, not talent following capital.” Money quote.Valuation is a reward that someone else gives you, not one that you give yourself. It’s an outcome of doing a lot of things right.Sadly, in crypto land, hyper valuations are a dime a dozen. The premium on the novelty is still staggering.
Crypto entrepreneurs should avoid “greater fool theory”, and just make a number and someone will pay an even loftier price later. Start to deliver value! Other boring (less media hyped) investments like eCommerce/SaaS still has a lot of potential for growth. Like the fact that only 4% of the people in the world live in USA (apx. 330/7500 = 4%). I believe that VC finance model still has potential over ICO, adding common sense to the investment and people management, to make good decisions.
Yes, but how many stories have you heard where a company loses lots of employees to the new “hot company” that just raised at a big number with the “right VC”?
There are lots of variables at play, in order to answer this question accurately.
I first heard this 20 years ago.But most people in any industry are success based and success based people are superficially, socially, appearance oriented.Never going away.The crypto bubble is just like the dot-com bubble – capital doesn’t know what the talent actually looks like yet, so it’s getting panicky and throwing big bucks at tons of crap.Same shit, different deck.
Huge funds need larger valuation to play the game. This is a cycle that will crash badly at some point. Something really out of whack.
The starting point is that there is too much money in search of yield after nearly 10 years of loose monetary policy. So, it goes back to the amounts coming into into the venture sector as a whole – can the economy absorb that much venture money AND deliver healthy returns in the sector. Since the money is available, huge funds are raised ( the 2% mgt fee). (Note: I am not saying it is easy for everybody to raise a fund, I am saying the money is available).Huge funds need to make large investments to put all that money to work. The natural outcome of the tension between “higher funding raised” and “lower equity given up” by a company is a higher valuation at an earlier stage of the company’s funding cycle.Also, the 2 inch thick deal binder that @philipsugar:disqus refers to makes it a somewhat funny valuation.
At some point someone will point company X with a huge valuation is really worth 1/50th of that figure. Tulips, anyone.
Was hearing just the other day that ‘The future is meow’.98% decline from peak usage.https://finance.yahoo.com/n…Note: Expect that crypto enthusiasts will respond that cryptokitties was just a proof of future applications.
every dog has his day.
probably fake ‘traffic’ to suck some unsuspecting VC firm in.contract signed, money in, bots turned off (in that order).entrepreneurs and crooks. it’s like love and madness. so hard to spot the difference.
>Tulips, anyone.Or like the dot-com boom and then bust, as @jameshrh:disqus said before me in this thread.
Theranos, anyone?All variations on a theme. Greed.
I am serious. At the end of every cycle I hear the cry: “they stole my company!!”Look you are not sitting down with investors that are doing deals like this singing kumbaya. You are sitting down with Tony Soprano, if you are lucky when things don’t work out he only breaks your thumbs, kneecaps you, grabs you by the neck, slams your head in the trunk a couple of times, and then goes mid-evil on you in the scrap yard.
To me, this is just human nature. Focus on the big money. It is driven in part by greed, in part by vanity, and in part by the fantasy of being super-rich. When you think of it, most of these traits are lurking at or near the surface of great entrepreneurs. Sure, they want to change the world and make a really cool product that helps people. But is it out of compassion or vanity and the desire to matter?
Sure, they want to change the worldThat is just parroting what they have heard others say. With a bit of millenial brainwashing ‘this is what makes a person good: caring about others, their community, giving back’. That started as you probably know with Steve Jobs saying to John Sculley ‘do you want to sell sugar water to children or do you want to change the world’. Prior to that the saying had not been popularized. Ironic because Jobs was one selfish prick and so was Bill Gates. No way around that. Guess what? So is anyone at the top. No way you can get there w/o being selfish unless there is something else going on.and make a really cool product that helps peopleHelping people feels good no doubt. But unfortunately I think in this world people have to focus on making money first and then with that money if they want they can help people (because that makes them feel good).And yes everyone typically wants to matter. If you matter you typically have freedom. Unless you matter so much (Marc Zuckerberg, Bill Gates, Elon Musk and now Jack Dorsey to name only a few) that all the sudden you have no freedom because everything you say or do is open to public scrutiny. Balls in a vice.Look at what Jack Dorsey did the other day? Made a tweet about Chick-Fil-A and all the sudden had to say he was sorry. What kind of life is that? Imagine being in that fishbowl? Great life? Who wants that? Below WSJ editorial yesterday. No more free speech everyone gets a vote but only the whiny vote. (As I said because it’s popular to voice an opinion that you know others will applaud you for – it’s a circle j)…. https://uploads.disquscdn.c…
Valuation. Total raised. Head count. Numbers that cause real harm when mismanaged. It’s unfortunate that these have become measures of success at startups.
> …the higher the valuation, the less money the employee will make on their equity.No arguing with the main point, but how is that possible?
I believe that Fred is implying that the higher the company valuation at the time of your hire, the higher your matching equity/options valuation, and so the greater the compression in value between any potential exit price and your equity’s worth.Assuming a company that starts at a very low value which goes up over time (which is not necessarily a solid assumption), early employees tend to make more money upon company exit than later ones. Vesting also impacts this, but is outside this point.
Ah, I see now, thanks a lot!
Despite the popular saying, reality is almost *everyone* judges a book by it’s cover.(no time/attention not to these days)
Funny thing is that me, Fred, and Gotham Gal were all way ahead with our urban scooter-riding hobbies years ago. And GG even invested in Scoot (which i’ve advised), arguably the first scooter sharing company of note.But this stand-up scoot craze– if that’s what it really is– is something else. None of the sit-down scootCo’s have gotten anything like this. I say *if*, because it feels very early to hype up valuations before we know if real mass uptake actually will happen.
It’s a friggin’ scooter! How many scooters do you have to sell to meet the hype machine’s expectation of a $2B valuation???!
It’s actually a lot more than that, or can be.An example: Coup (electric personal sit-down scooters), here in Berlin, is mostly funded by Bosch, the huge consumer electronics company. They see the whole service as a moving mesh network and IoT play that will benefit them through data.
How is that different than mobile phones “as a moving mesh network…data” (everyone has a phone; everyone does NOT have a scooter)
“everyone has a phone”, but they aren’t all opted into a particular service where they are networked with and between each other (“swarm”) (at least not to their knowledge, and assuming their privacy isn’t compromised– which can be a false assumption).
Wow, so consumer hardware companies like Bosch are now getting into the business of data, like Google? Or is it for their own use?
too long to type out here. I actually know a lot about it.
i’m with you Jim.
See here is the problem. It is not a $2B valuation. If it was the investors would simply hand cash to the common shareholders.They didn’t do that. It came with a deal book at least two inches thick. 1.9 inches of that book are terms that are for the investors and against the commons.
TIL $1B per inch of prospectus. OK, got it. Finance is easier than I thought.
Nobody shares those terms (nor should they) But let’s take an extreme simple example. I can give you $100m on a $2B dollar valuation with the stipulation that if you don’t return to me $1B in 3 years, warrants start kicking in that basically mean I own 100% of your company by year 5.Now was your company worth $2B or did I just buy it for $100mm?Well, the truth is not known.
sounds like what Kevin on Shark Tank does, after most every pitch.
I take great pride in the fact I have never watched a single minute of that show, or you are fired show or that dating show or any other “reality TV show”. Not a single minute. Well, I will admit to watching a minute of the “naked and afraid show” but I don’t know if you would call it watching because I had my head cocked like my dog looking at the TV just not understanding.
Well to start I have made money off those shows (real money like buy a luxury car money with the profit). Second it’s entertainment. So it’s no worse or vacuous than watching football or sports or anything else people watch for entertainment. Or a broadway play  Third if you study human nature (because it helps you in business which I do) it can be helpful. Sure it’s a bit “John Wanamaker” (a beginner watching won’t know which 50% is made up and what is not) but there is a great deal that is true that is going on as well. I am talking broadly about reality tv. I know that for a fact first because I watch enough of it (with my wife) to see it and second I’ve helped people that have gone on (as one example) Shark Tank and got funded. And I’ve done deals with Marcus Lemonis of “The Profit” (started with a cold email btw.) Three times. It’s like anything else you have to develop a taste for it. But it can be very good. Especially (like with Ice Hockey) when there are fights or (like with auto racing) when there are crashes. Or personality breakdowns. I watch also because I study facial emotions as it helps me when I am dealing with people. That is a skill that I have. I can read faces very well. So just on that level with many shows I will review that stop/start/replay just like someone would do with NFL game films.One thing you have to understand about reality shows (other than what I have already said) is that in the end some of the things they have (say those home renovation shows) are purposely crafted just so you can get upset and frustrated that it’s not real or, like with game shows, ‘hey I could answer that question!! So easy!!’. So there are things that are purposely there just so people who know can think they are superior ‘so stupid!’ and people who don’t know can say ‘hey I could do that’. That is part of the formula (just like the easy questions on jeopardy). It’s a well honed formula in TV game shows. This is a pattern I recognized as a result of watching enough to see it happening. Point is the appreciation is like art in a sense. If you watch enough you can enjoy and value on many levels. Just like you have to learn to like a basketball game but its not going to help you play basketball (ie the business knowledge value is low and obviously misleading).Shark Tank I stopped watching literally I think on the third season a long time ago. When do I stop watching a show? When it jumps the shark and becomes to predictable because you know what all the characters are going to do and it doesn’t provide any further value. Going to a Broadway (fake) play. Think Hamilton was accurate? Is that why people paid so much to see it? No it was for the entertainment value not the content.
Making money off of dummies is all good fun. You know if your customers could do it you would be out of business. (or they just prefer to pay because they can make more money elsewhere)
I should add an important point. You the founders and employees are not going to receive one cent. Not one cent. My $100mm went to build the business and you did not deliver on your valuation. You got thrown out year four, and your employees who have mortgages and school bills have a choice…….work for me or go bankrupt. Yup it was a unicorn, but that horn went somewhere.
Wow. You may not be able to quote like Girish, but you sure can create your own stories. That’s about three so far in this thread – the Tony one and two others. Keep on rolling.
I don’t create them just seen and lived them
Yes, I guessed that. How you state them is what I really meant.
BTW: I speak with that guy in the inner city. I talk about what it is like to be in a software company. He talks about what it is like to be a mob enforcer in South Philadelphia at age 15, and what happens if you think you are a tough guy. He is now successful in real-estate. thirty years later.Always a good story, when we first met, we backed into each other. We both said we were sorry, then we looked at each other and shook hands. I looked at him and his hands, arms, and tattoo’s and thought, I do not want to ever play with this person. We sat on stage and had a nice talk afterwords. I am a 250lb man.
Super nice guy. He tells kids why that lifestyle will end you dead or in prison. You can’t just tell inner city kids: “you should learn how to program and be like the rich suburban kids” He is frank about his former life. He regrets it, but it was who he was back then. I think we are good ying and yang. If I just get up there, kids will think: “what does this Ivy League guy know what it is to be me?” He can tell them I know what it is like to grow up poor with a working single Mom, and want to make money for yourself.
It’s not, though. It’s not an arithmetic progression. It’s a geometric one, like the terms (math pun intended).
Does it come with snow tires and a battery warmer? We could use that in some places of America.
Would you fund my new startup? Great deal at only $500M valuation. Meet the SUS, the Sports Utility Scooter. Perfect for Chicago winters.
Why is the valuation so cheap?
Make me an offer
I’m raising a Series A for my winter urban scooter company, SnowMobile We have a full fleet of the beauties picture below, perfect for unused winter bike lanes. DM for term sheet. Will be 2x the price in 3 weeks… pic.twitter.com/XF225YkATl— Mike Dudas (@mdudas) June 13, 2018<script async=”” src=”https://platform.twitter.co…” charset=”utf-8″></script>
no joke. I can tell you that as a hardcore user of personal transport devices, that a big issue is most lives are fairly routine year-round. You develop your commute, school, childcare, workouts, dining, etc, and you build into it ways to get around them all. If you have come to rely on bicycles, scooters etc, it’s a real issue to have to pause that seasonally (once in a while due to storm weather etc is acceptable).My way, here in northern europe, and in NYC where I lived prior, is to move away for the winter. Doesn’t work for most people.
Where do you move to? My wife and I now spend the month of Feb away from Chicago. I could see spending more time than that as long as it wasn’t God’s Waiting Room (Florida) I like your [email protected]:disqus
I left NYC for Europe (Berlin, now) in late 2014. Has a lot of great aspects. Winter sees me in Florida a bit, too, and a bunch of other (usually but not always warm) places.
Will state again that I think it’s stupid when anyone rides a scooter (of any type) around a city. Even when Fred rides his scooter around Manhattan. Which I have stated here before. A few times. Why take a chance with your life or with getting injured (when you can afford, let’s face it, a driver)? Sure it’s fun. Sure it’s convenient. But so what? Your life (and not getting injured even if small chance) is much more important. When I was a kid I wanted a mini bike. My dad refused to let me get one. I’m glad that he did that now. And that was riding around a suburban neighborhood where there aren’t many cars.These little scooters are even more dangerous. You don’t even have any power to get you out of the way of another moving object.That said people who love alternate transportation don’t spend any time outside of cities apparently. In those places cars are essential and the vast majority of the country is happy with the way they get around without ride sharing and all of that jazz. Not that this is that relevant to my point but many people ended up on opiods because of some injury sustained as a result of an accident or some type.
This trend seems enabled by the over-romanticized celebrity status that is given to entrepreneurs these days. The news reports on unicorn CEOs like rockstars, and I don’t think it does us any favors.
i agree. it’s an extension of marketing through publicity, but it seems more like the Hollywood film industry approach and the hyping of their film stars.
Very true, and coming from the marketing world I can see the advantage of turning your CEO into a thought leader.But, the practice is often harmful to the ecosystem at large. Much like we note that swimsuit models set a bad example for young women, these celebCEOs set a bad example for young entrepreneurs.We need to get back to idolizing traction, impact, and a team with a work life balance rather than valuations and burning capital.
I completely agree with over-romanticized celebrity status is a problem for the industry. The best example of the problems caused by such celebrity is Elizabeth Holmes of Theranos. She perpetrated a fraud for years in part due to her celebrity status. Read Bad Blood by John Carreyrou.
Thanks for the recommendation Mark, I’ll be sure to check it out.
The news in general… blah
I understand your context and agree, but I love that my kids have entrepreneurs on their radar and not just entertainment types.That “celebrity status” given to entrepreneurs is more deserved than that granted to many others. But the over-romanticized part, yes, a problem, especially when it comes to things like valuations.
> It should work the other way around. I like to invest in companies that smart people are joining. Capital should follow talent, not talent following capital.At no point would it ever occur to me that joining a company would cause them to get a good investment. That being said between high real estate prices and student loan debt the ability to eschew a well funded organization in favor of the interesting one is not an easy proposition for most modern millennials.
I love the content of this post and the straight shooting tone.Of course, the following caught my attention:Capital should follow talent, not talent following capital.What a powerful statement!I experience that a compelling story is still one of the most effective tools for attracting talent. The story must be well articulated.
Valuation is an indicator of POTENTIAL of the market, business, founders and management team. What happens on exit is the final value on the EXECUTION of those four factors towards the potential. Valuation has no bearing on the ABILITY to execute.We’ve all seen plenty of people (and companies) with great potential fail to live up to expectations because they were unable to execute. To Fred’s point, talented people and businesses who execute will always get a higher exit value than those who had lofty expectations but were unable to meet their potential. Therefore, obsess on talent and be skeptical about potential.
I would like to think this post is a response to my comments of the last week 😉 As I said if Microsoft buys you out that is real money cash in your pocket. If you raise money with a deal binder that is two inches thick, that is not real money. It is real in the fact that you have it for your company, but other than salaries it does not go to people. Not one dime.I’ll say it again, you will pay it back with interest. And that interest can be you getting kicked out of “your” company (because it’s not yours after you raise money). It feels good to raise and spend money. It doesn’t feel good when the bill comes in.And I agree with Fred, if you’ve raised money at a Billion dollars, you as an employee should rationally think your options are worth nothing.
If you raise money with a deal binder that is two inches thick, that is not real money. It is real in the fact that you have it for your company, but other than salaries it does not go to people. Not one dime.And guess what? Better to fail with that ‘not real money’ than to fail without it. You get the branding. It’s like dropping out of Harvard. It will get you more in life than graduating from Temple or Penn State. And you know that is the case.And sure it has other ‘value’. As an example back in the 80’s we made the INC 500 list in the 300’s. And that was actually a big deal at the time not like INC now who cares and they have the 5000 etc.. It was total bullshit of course. I knew that – no kidding. ‘Fastest growing companies’. We had to fudge the number in the starter year to $100k because in yr 1 we only had $70k of business. (Which should have been better but go figure their logic). So got the accountant to write a letter saying we had $100k in sales the first year. Anyway lots and lots and lots of good things came out of being on that list. Helped when I wanted to sell the company (mattered to the buyers because they could extend the ‘ruse’) and mattered to the bank. Back then there was actually people that thought about small business loans) mattered to friends mattered to family. And yes we did do more business as a result of that ‘branding’. No question about it.I will say one other thing as well. As an employee I think it does matter if you work for a company that everyone has heard of when you go to get your next job. The publicity of a big raise does do that. So there is benefit. It can help you with your next opportunity. There is a bit of a halo that rubs off on you. Now maybe not everyone cares about that halo. But enough people do care to make a difference. That is what matters. You don’t need to convince everyone by social cues. Accountants would do that back in the 80’s today you can’t even get a legitimate letter out of them!). Anyway the fact that sales are even at $100k should have been a red flag. But it wasn’t.
The site is 50K MAV because Fred detailed what was in those binders, basically.Great perspective as always, Phil.
It’s job security. The rational employee thinks like this: “I’m joining a company that is valued at a billion dollars because it’s a strong signal regardless of whether the company is actually successful or not”. Most techies can’t and frankly won’t do the real math -> https://danluu.com/startup-… Anyone who’s been in SV long enough knows that throwing Google/Facebook/Uber/Twitter/etc. immediately gets you through the initial filter. If you join the no-name tech company that never raises a dime and it fails, it’s incredibly difficult to find a solid next job prospect no matter how good you are. If you join the well-known company that fails you can at least throw around “ya I was part of a unicorn backed by Sequioa”…eyebrows still pop up if that happens.
you might be thinking of something slightly different: FB is mostly a centralized service.Companies like Veniam (a USV portCo) develop true decentralized mesh networks for moving vehicles. GoTenna is another USV co that also does related tech. Coup for scooters, etc. All do their magic mostly via nodes communicating peer-to-peer with each other, rather than a network of devices (the FB phone example) that mostly transmit/receive via cell towers which are distributed but still act in a largely “centralized” fashion.
I have always thought why doesn’t the post office do this. They are the ultimate. In the U.S. you have 140,000 of the same exact Grumman vehicle on the road every day. 38,000 post offices.https://facts.usps.com/size…
i know, cuz, “cutting edge innovation” and “the post office” go hand in hand! :))
You know shockingly they have gotten much better. Now I am sure that was at the extreme expense of IT contractors.But if you equipped those trucks with an extra $2k of technology: $250mm and those post offices with another $250mm……You want to talk about data? Insane
i was kidding, enough to retract my joke.i was letting the Seinfeld/Newman perception color my comment.Here in Europe, 1 of the most easy to deal with banks is PostFinanz, an offshoot of a postal system.
I don’t think you have to retract it. If you think about their footprint, even if they just said we have weather, gps, wifi, mesh, storage, camera and every truck goes back to a hard wired internet post office each night. We will allow you to access for 50% of the revenue, and we reserve the right to cancel you if a rival gives us a guaranteed offer of double your share, what the revenue would be.
I must be the only one thinking we are in a bubble now. Prices will reset eventually.
im in an industry where money is falling from the sky. quite frankly my greatest fear is raising money at *too* high of a valuation. it is clear we are at a local maximum. at some point in the future we will need to exit and will have a higher exit burden. i am also very conscious of raising down rounds. the idea of optimizing for highest valuation has never made sense. strategic partners and good investors > biggest number on the table
i should clarify that capital is justifiably flowing– but very little is strategic
Agree with Fred big time on this. It seems SV Angel does too by they actions. I’d add a couple of points. 1. a zero interest rate policy almost worldwide for around 8 years combined with QE forever has changed risk tolerances. It’s caused capital allocators to seek riskier assets to get greater return.1a. the new tax plan is going to drive a lot of transactions1b. heavier government regulation from 2008-2016 drives a lot of consolidation2. a lot of new capital has found its way into the VC market looking to get return, but also to invest in and learn about technology. We are in a technological renaissance not unlike when humans emerged out of the Dark Ages.3. a lot of the new capital hasn’t learned the lessons of the past. It’s undisciplined.4. more capital chasing fewer deals will drive up prices.
a lot of the new capital hasn’t learned the lessons of the past. It’s undisciplinedSome of the events that came to mind when I read this — which still seem recent to me — were close to 10 and 20 years ago, before the time of some (if not many) in the ecosystem.Sorry I missed you yesterday when in your building!
Yup, it would have made my day to see you. Hope your meeting went well and I’ll see you next time you are there
It seems to me to be a supply/demand problem as well (although not the way you referred to it the other day). There is A LOT of VC out there right now chasing what I think is diminishing set of valuable startups (at least in the software space). The VCs will naturally pump up valuations in order to get their money into those startups. Its a seller’s (the entrepreneur) market right now.
No Segway for that comment?
Oh, just roll with it.
the facts are becoming all two wheel.
keep on turnin, keep on turnin
That line was butter left unsaid.
No thanks, we are too busy.https://jugad2.blogspot.com…
A rolling scooter gathers no debt (only equity).
“the higher the valuation, the less money the employee will make on their equity.”the sad truth is that talented employees (vertically and not horizontally talented) don’t necessarily understand what they are signing up to. they bash the code, architect the network, map the marketing, but what does that have to do with the ‘magic of numbers’ down the road?
I like to think that raising institutional capital is similar in some ways to dating and relationships. For instance, warm introductions tend to yield better experiences than random blind dates (at least it used to before Tinder et al). When it comes to valuation arguing about the number is similar to arguing about the size of the engagement ring. The size of the ring does not correlate with the success of the marriage. Valuation is but one economic term. As an entrepreneur you might think that you are winning by getting a big valuation, but there are many other economic terms that can be employed that will effect your financial outcome (e.g., dividends, participation, preference, anti-dilution). Just as a big ring does not guaranty a successful marriage, a big valuation does not guaranty a big pay day for the rank and file and sometimes even the founders.
Does it run on Blockchain ?
No but it has its own Artificial Intelligence valuation engine
I am going to play the devil’s advocate. As an early stage ops mgr, a company balance sheet is of importance to me. If they have money, revenue or investor provided, I am interested in knowing if the company can do the things sales and marketing wise while paying me a livable ( that’s me not having to drive 25 hours for rideshare companies and not market rate) salary and to make the company a success.
Well said as always Fred. Esp pointing out that talent wants to work for > $1b companies. Those are the folks who don’t understand just how perverse logic that is, esp if they looked at the terms behind those valuations. They’re mostly working for the salary and have little chance of upside.
You are right Fred and well said.Investors and entrepreneurs live in different worlds obviously, and while you are a critical audience, not the only one and the pressures from the rest are deafening at times to disregard even if correct.
It’s really past time to questions the ethics of VCs again. Back in 1999 and their conspiring with securities teams of wall st was disgusting. Today what they are doing may be equally as bad. From Coinbase playing block and tackle for insider trading, to Theranos putting people’s lives at risk, to Bird taking over the sidewalks and dismmising any public concerns, the VC crowd has shown again, it’s all about the money.
I hope that people will come to understand that it is what underneath the covers that matters and the headline number is just that.It’s a proxy for ‘importance’ and ‘pay attention’. So it’s not going to go away.Let’s say you get an email one day and decide to google the person sending (after reading the email). You find out they ran Boeing (which has a $214b dollar valuation and I’ve purposely picked a company that is not in startup land and not even relevant to what you do). You are not telling me that you are not going to take that more seriously than if you got an email from a person with no discernible evidence of ‘success’ and a halo?. Well that is what people are doing in a nutshell. They have been conditioned to look at certain ‘tells’ as being an reason to pay attention. Everyone does this. Even the Pope. Think of all the famous people that the Pope would probably meet with vs. the chance of an everyday person doing the same. And there is nothing wrong with this and it’s common and it even makes sense.Now that said the way you look at things is a bit different. You make your money many times in discovering things before they have been branded with a halo that others easily recognize. (And you’ve even said I think that you buy art of undiscovered artists as well).
Fred, one of the best ways you can help is by releasing some numbers about employee equity percentages that employees receive at various stages of a startup. And make the case with data that joining a company after the valuation has crossed eye popping numbers results in a smaller payday.
One suggested edit:The *mercenary* talent market is looking to the investment community to signal to them what companies are worth working for.Missionaries are hunting big challenges not big valuations.
2026 FIFA World Cup Finals final, MetLife Stadium, NJ.
Agree that there’s a hyper focus on valuation, and it’s always a big part of financing (how much of the pie / dilution will you give up for X dollars). For media, it’s easy for many readers to digest.For startup employees the probability of equity gains is already very low, when you factor in high valuation as a signal to future liquidity + lower dilution it’s not necessarily negative.Few typos I spotted : “without taking about the price”, peverse, and benfit
.We use the word “value” in a haphazard and sloppy manner — myself included.In fact, these valuations are not comparable.Traditionally, we can look at valuations as being: enterprise value, valuation by multiple, comparable company analysis, precedent transactions, discounted cash flow, ability to pay, LBO, SOTP (sum of the parts), appraised value, and investment value.What is not said is “market value” or “liquidation value.”Markets can make mistakes when they are thin.The fact that Microsoft paid a certain price for GitHub – a strategic acquisition which can violate every valuation technique with impunity – after GitHub raised money at a high, but much lower, valuation shows the conflict.Having said that, there is a bubble because none of the valuations are held to the strict methodologies noted above. They are “investment” value only.JLMwww.themusingsofthebigredca…
Valuation? You have to love this type of thing (Commercial Real Estate, Wework, $40b valuation):WeWork doubled its revenue to $886 million last year, though its net loss also doubled to $933 million because of heavy upfront investments to open offices, according to financial documents reviewed by The Wall Street Journal. Executives say office locations that have been open at least a year tend to have strong profits.https://www.wsj.com/article…So it seems that commercial landlords are not willing to be flexible with leases however wework finds it a good business model to sign long term leases (with landlords) and then lease those offices out and take on the risk. Do I have that right here? Sure it was being done before (Regus etc) but not like this. And not valued like this.And the secret sauce is just environments that millenials want to work in? And corporations not being tied into long term leases (what they are doing now)?What are all the people working in these offices doing anyway?I am reminded of when I worked for a very short time in the early 90’s in Silicon Valley. The people working there would ship everything as Fedex overnight. Even heavy items. It all went Fedex. They didn’t even know there was a way to ship by truck that would essentially get there quick enough. You know like a truck LTL. The only way wework can make money is if they vastly overcharge for what they are providing. I know this partly even based on what I am able to get for shared office space (I own exactly 1 shared office the rest are single tenant). In that case two tenants (of 5) were previously renting from Regus offices. The amount that I charge is less than Regus (have to thank them really) and I look like a bargain in comparison. However I am still making out very well. Much better than with the single tenant offices actually (or a psf basis).
.Everything in RE looks through to the underlying credit. There is no credit support at the user level, so WeWork has to backstop that exposure.I don’t get the “heavy upfront investments to open offices” factoid because their pre-opening expenses and tenant improvements would be written off over the term of the lease.I don’t see this working out well for anybody. Back in the Regus days, I had several similar home grown operations I sold to them (or someone like them).Regus bought the operating business plus assumed the underlying lease. It was very lucrative for us as the seller.I think WeWork is going to have a hard time of it. They have to keep making longer term commitments to own their turf. The second one of these spaces goes dark, someone will snatch it and operate it.JLMwww.themusingsofthebigredca…
I don’t get the “heavy upfront investments to open offices” factoid because their pre-opening expenses and tenant improvements would be written off over the term of the lease.Yeah I was thinking exactly the same.I think WeWork is going to have a hard time of it. They have to keep making longer term commitments to own their turf.Isn’t it a bit of a ponzi in a way? They keep opening offices and expanding in order to hide the underlying viability of the business model. And also using the money to experiment in new business areas.Also (and this is important) while apparently they have locked up (the narrative goes) some good corporate accounts ‘our new direction’ I am thinking that is just something that is talked about and weighted more than it should be to make the company seem more secure than it really is. So the ponzi (I don’t mean it literally) can continue. Kind of the same way I think Buffet owns the furniture stores or other small companies which honestly is not the way he makes his real money. People (and the press) are very susceptible to that type of ruse I have found.Lots of these wework tenants are essentially I believe startups. Which as we know fail. So we are not talking about a market that will continue for ever. Now that said of course they could morph into another business (which they are). Once again when you are outside looking in you never have full access to what is happening.And how defensible is the tenant base anyway? This is not a retail location where you don’t want to move from (or a restaurant or a assembly line). Moving an office isn’t easy (to a lower cost location) but it’s very possible to do that. Especially for a small space that you have not built out.
Valuation doesn’t matter nearly as much as change in valuation.
But, it seems, the talent market is looking to the investment community to signal to them what companies are worth working for.Well, for “what companies are worth working for”, “the investment community” doesn’t much care, won’t make the effort to know, and doesn’t know.It should work the other way around. I like to invest in companies that smart people are joining. Capital should follow talent, not talent following capital.Okay, an attempt at “reversible raincoat prose”, but on who the “smart people” are, again, “the investment community” doesn’t much care, won’t make the effort to know, really isn’t qualified to know, and doesn’t know.For information technology VCs, what matters most of all are some simplistic numbers, e.g., Comscore data on traction significant and growing rapidly, e.g., as athttp://www.unionsquareventu… Uh, apparently the C-suite could be all solid, serious business or just a drugged up sex orgy as on Obama’s Air Force One, and given the numbers, so what? VCs believe in a Markov assumption: The past and future of the company are conditionally independent given the current simplistic numbers.E.g., for a Web site startup having “hundreds of thousands” of users, suppose that they have, say, 200,000 users. On average each user visits once a week and sees 25 ads. Suppose from some of the Mary Meeker (KPCB) reports, the Web site gets $2 in ad revenue for each 1000 ads displayed. And suppose the site has a sole, solo founder, 100% owner. Then the weekly ad revenue would be, and may I have the envelope, please [drum roll], “RIP”, and the answer is: $10,000. Then the annual revenue without additional growth would be, right 52 weeks in a year, $520,000. So, THAT’S when a VC is willing to write a check. Do such VCs also like to buy tickets on airplanes when they took off a few minutes ago and are already 5000 feet in the air, at 0.5 Mach, climbing quickly? A sole, solo founder running a Web site with $520,000 a year in revenue needs a VC check, term sheet, and BoD, like, what, a 20′ long tapeworm and pancreatic cancer?Such a sole, solo founder case is possible? Well, sure, there was Markus Friend and his Web site Plenty of Fish. For a while he was a sole, solo founder with two old Dell computers, ads just from Google, and $10 million a year in revenue. Apparently he grew the company and as inhttp://techcrunch.com/2015/…sold out for $575 million.Well, there are claims that VCs don’t like sole, solo founder 100% owners. Okay. Maybe better would be five founders, with all credit cards maxed out, and each with a pregnant wife?
I recall, during an earlier period of hyper-valuations, the experience I had meeting with a startup. I had paid a visit to the company, but no one except one engineer was there. He told me that they had just raised $xx at $yy valuation. Without thinking (a character flaw) I responded, saying, “don’t confuse the ability to raise money with the ability to deliver a winning product.”I didn’t get the interview. And the company failed before getting to market.
Completely agree with this. However, there is something to be said for drawing consumer interest through these big valuation numbers. A big draw for venture capital is its “sex appeal” (wish I had a better descriptor for that) and these valuations ensure that one of the industries main draws stays that way. Not saying its right but an understanding of why it is the way it is is important.
I don’t think entrepreneurs appreciate the fact that valuation is much more about setting expectations than getting a result.The slow painful deaths of late stage startups tends to start with a large, high priced financing round. If the money isn’t put to good use/increases growth at a fast enough rate, the valuation becomes unsustainable.A dropping valuation reduces the possibility of a new fresh round. The result is either a down round, a lower priced exit, or failure.
Yup, failure. Right, that’s the end of the story. There are lots of paths to failure, but they all lead to the same place, the end.If get a big financing round, terrific! Then quit going to restaurants, bring a simple lunch from home, dress code, blue jeans and cheap running shoes, make ice water the standard drink, buy only used office furniture, assemble own computers, when everyone else is rushing to DDR4 memory, stay with DDR3, as often as possible, follow the KISS principle, keep it simple, stupid, and put all that extra cash that might be burning a hole in your pocket in the bank and LEAVE it there for any real disasters, not just ordinary rainy days. If in doubt about hiring, then DON’T. Then, execute on your plan to profitability!!! Remember “Adding programmers to a late programming project makes it later.” — extra credit for knowing the source. Or Metcalf’s law is about the quadratic network effect. Well, there is also a quadratic effect as programming teams grow — costs and complexity can grow quadratically.”Too many cooks spoil the broth”. When have Michelangelo painting the ceiling, don’t send in a lot of second rate house painters to “help” him.This stuff that a big financing round increases the chances of failure is just nonsense for fools. On money, like Marilyn Monroe said in Gentlemen Prefer Blonds about a diamond in an engagement ring, “It can never be too big!”. If people want to give you money, then take it!For their expectations, once you have cashed their check, advise them nicely that you are as eager to make the big bucks as they are, likely much more so, and that they need to think about something else, that a watched pot won’t boil, that squeezing the neck of a goose to lay a golden egg will lower such egg production and may kill the goose. If they don’t get the message, ignore their calls. If that doesn’t work, then tell them something obscene about putting their head between their legs.Remember the TV ad about rice: The mother says that her daughter’s rice is perfect, and she KNOWS her daughter is. But before, the daughter boiled her rice, and stirred it and stirred it and stirred it and STILL it came out all sticky and gooey!
Was this catalyzed by the recent Opendoor $325 million funding round, by chance?
I counsel founders as follows:The best money is money generated by selling value – it reflects appreciation of what you do nowMoney raised that you did not generate yourself reflects a hope of what you might do in the futureAs such it represents a slice of ‘not yours’ and a slice of everything you do in the future.Caveat – Sometimes it makes sense(if you know you future is brighter than reality by more than your investors believe AND because of their investment).As such it requires that they underestimate you !Bias Disclosure: Still bootstrapping away slowly but steadily.
The problem with getting capital to follow talent is it’s arguably more subjective and much harder to signal to the job-seeking masses. Hence the focus on the valuation number, which always sounds way more unimpeachable (a cautionary tale in its own right). It sucks, but in a way it also helps less buzzed about startups naturally filter out folks whose primary interest is working for a “hot” company, and less about the product and team.
“This is particularly perverse because the higher the valuation, the less money the employee will make on their equity.” – this is not correct. Stock options on higher valued shares are worth more. While a potential payout is greater with cheaper stock options, it is also a lot less likely.