Every six months around a certain prestigious accelerator’s demo day event, my Twitter feed lights up about how high seed valuations are in today’s market.
The conversation goes like something like this:
“Seed valuations are out of control.
I remember when they were $3M pre.
A lot of people are going to get hurt.
I can’t wait for the market to correct.”
My response:
“Then don’t invest in these companies.”
Valuation is the last thing on our due diligence checklist. How much is a startup worth? It’s worth what the market will pay. The valuation for an experienced team with a history of product success that has proven it can attract exceptional talent will garner a higher price from the market. You either believe that they can build a larger company well north of that valuation or you don’t.
There are plenty of examples of investing in early-stage teams at higher valuations than AngelList’s terrific startup data that go onto achieve phenomenal success. If you opine that you just won’t invest more than $10M pre in a seed company, then you have every right not to invest. I respect that, no foul. Just understand that your model may be different than other investing models in the market.
Even in the worst of markets, the best teams are expensive. Whether you choose to pay for this or not is your prerogative. Garry Tan (of earlier said prestigious accelerator) said it well the other day:
“There’s no such thing as value investing in early stage tech.”
Think about this imperfect example: pretend that you had an ability to invest in the 2014/15 Kentucky basketball team at the beginning of this season. They were widely regarded preseason as the team to beat with the best overall talent bar none. This team would have commanded the highest price available. If you didn’t want to pay the premium price, you would have missed the first college team to start a season 36–0. If they win it all, they will end up 40–0. Their price may now be seen as cheap given what they have achieved to date.
Just as the sun will rise every day in the east, look for this chatter to make its way back to Speaker’s Corner shortly. The valuation conversation has been around as long as I can remember, and will never rest well into the future.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
