The Best Startups Are Expensive

Investors that use valuation as a reason for passing aren’t courageous enough to tell the founding team their main reason for saying no.

We are currently talking again with a team that is raising more capital after we passed on their seed round one year ago. We passed because I thought their seed round valuation was in the stratosphere. Everything else about the team, product, vision and fit was terrific.

Mistake.

Quality merchandise comes at a price. If people are willing to pay more money for a Tesla than a Dodge, then why are many investors unwilling to pay more for innovative founders with a passion that are building something special?

It seems everyone is so quick to exasperate over how much a group of vcs/investors were willing to give a certain startup before they have “proven” anything. This is usually the response:

1. I can’t believe [Insert Investors] put that much money into [Insert Startup]!
2. I mean, what are they thinking!
3. Don’t they know that [Insert Competitor] is going to eat their lunch?
4. They don’t even have any revenue yet!
5. And how on earth are they going to monetize?
6. We must be in a bubble.

Investors that use valuation as a reason for passing aren’t courageous enough to tell the founding team their main reason for saying no. Listen, if you just believe the team can’t pull off the crazy vision they have in mind, then be honest and say precisely this. No harm, no foul. Just don’t take up the team’s time in coming to this conclusion. I’ve passed on plenty of crazy ideas that ended up working incredibly well (and continually kick myself for passing on these teams).

Interestingly enough, it works both ways. Those investors who founders want in their deal because their reputation is helpful and their network lines up with their thesis will demand a certain price. These investors will be willing to go up to some level of valuation and investment they feel is fair and will stop there. Other groups may be willing to pay a higher valuation but the founding team must ultimately decide who represents the best value.

We have been passed over from founding teams (more than once) who told us they wanted us in the deal only to be told no when the round was wrapping up because some other investor came in at last minute and the founders gave our allocation to them. No sour grapes, we’re big boys/girls, we welcome the competition. But when that founding team comes back later asking us to invest in a future round when things go sideways, well, let’s say it’s sometimes hard for us to get to the finish line.

We are fortunate to be given a second chance to potentially invest in the follow-on round of the aforementioned startup on which we earlier passed. I don’t expect any founders to “keep me posted on their progress” if we say no to their round. They don’t owe us anything — they have product to build not time to keep vcs who passed on their round abreast of their numbers. At the end of the day, founders and investors who see the world the same way are looking to find each other and will get connected.

By the way, the valuation of the follow-on round that we passed on “due to valuation” is much much higher than their earlier round.

Expensive? Absolutely.

Are we passing again? No way.