valuations are for egos
July 10, 2007 – 12:38 pmJeremy Liew started quite a discussion in the tech vc blogosphere with his post Asymetric risk and the danger of too high a valuation which was endorsed by Josh Koppelman and bashed by my fellow silicon alley alum Jason Calacanis and indirectly criticized by (and what might have influenced Jeremy’s post) Marc Andreesen.
As someone who works in startups – I’m on the side of the entrepreneur. I’ve also worked with vc’s and pe investors as well and know with the best of them that they are not always in it for the entrepreneur so I am sympathetic to Jason’s and Marc’s point of view that entrepreneurs need to look out for ol’ #1. That being said – Jeremy and Josh are right – there is risk in taking too high a valuation just like there is risk in taking too much money. And the risk as Josh rightly points out is if you take too high a valuation you do limit your exits? Josh does a great job breaking down typcial exits and from my own experience I can anecdotally concur. I’ve been involved in lots of buy-side m&a deals buying startups and valuations at that point matter and generally must be justified with semblance of financial reality. Unrealistic, inflated valuation and no deal, no deal then no exit.
That’s important because as an entrepreneur you don’t get paid until there is an exit (or perhaps a partial exit in the case of a PE late stage deal when founders are often bought out or partially bought out to help limit dilution). So why limit your exit options with a high valuation unless it’s too boost your ego by being able to tell all your entrepreneurial friends you’re company is worth X dollars? Wayyyyy more startups never see an exit then see one so its important to keep your options open. If you your at a $12 mil post series A valuation then you can sell at $25 to 50mil to a lot of companies and everyone – the vc’s, founders, and employees – walk away with cash. And lots of private and public companies can afford a deal of that size. The problem with a $50 mil, $100 mil or apparently $200+ mil in the case of Ning is that the companies who can afford a deal all have to worth a lot themselves – $500 mil or more. There aren’t a lot of companies in that space. Then you’re stuck hoping someone huge like Google, Yahoo or FIM buys you in case you’re an Internet media company.
I am currently working with Loomia, a startup in the personalization and recommendation space, and we compete with one of those companies that has what I would argue a silly valuation – aggregate knowledge (“ak”). In a twist of past lives I know the founders – paul and chris – and a member of their sr. management team – kurt – so I am happy to engage in some good natured ribbing here. AK raised a $20 million b round with a pre of $60 mil supposedly and a post $80 mil valuation! Ay Carumba! AK is now in the position where they have to hit a homerun to get an exit – not saying they won’t do it – just that their margin for error is tiny.
But what’s even more interesting is that Josh Koppelman was a seed investor in ak! So it’s a good question – Josh what happened? Did Paul, Chris and Kleiner Perkins ignore you’re advice which I am sure was the same as your blog post? Inquiring minds want to know.
