Valuation

What the greatest technology investors say about Valuation

VALUATION POSTS (35 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order.  For example, following this list, Fred Wilson’s posts appear towards the beginning of the blog page, and Boston Millennia Partners’ post appears towards the end of the blog page.   

 BOSTON MILLENNIA PARTNERS (1 post)

Boston Millennia Partners:  Early Stage Investing is Far from an Exact Science

JEFFREY BUSSGANG  (1 post)

Jeffrey Bussgang:  Relationship between Option Pool Size & Price

CHRIS DIXON  (6 posts)

Chris Dixon:  How Much Seed Money to Raise

Chris Dixon:  Problems Taking Seed Money from Big VCs

Chris Dixon:  Nothing More Dilutive & Morale-Crushing than a Down Round 

Chris Dixon:  Never Share Your Minimum Valuation Number with Investors

Chris Dixon:  The Company’s Stage: Weighing Investor vs. Valuation

Chris Dixon:  Tranching Can Create Misalignment of Interests

BRAD FELD   (1 post)

Brad Feld:  The Math behind the Valuation Calculations

BRIAN GARRETT  (1 post)

Brian Garrett:  Do More with Less Before Raising Outside Capital

ROB HAYES   (1 post)

Rob Hayes:  Going for Growth vs. Revenue

JOSH KOPELMAN (2 posts)

Josh Kopelman:  The Unwritten Term on the Term Sheet

Josh Kopelman:  High Valuations Can Limit Exit Opportunities

JASON MENDELSON (1 post)

Jason Mendelson:  Investors Only Care About Returns & Control

BABAK NIVI  (1 post)

Babak Nivi:  The Biggest Mistake Entrepreneurs make when Raising Money

BASIL PETERS  (7 posts)

Basil Peters:  The Exit Strategy is the Most Important Business Plan Element

Basil Peters: Why VC's Block an Exit

Basil Peters:  Angels Need a 20-25%/yr Return

Basil Peters:  When Can You Sell?

Basil Peters:  How to Maximize the Selling Price

Basil Peters:   Strategic Value Increases Valuation

Basil Peters:  Valuation is Driven by the Future, not the Past

NAVAL RAVIKANT  (1 post)

Naval Ravikant:  Valuation is Temporary, Control is Forever

MARK SUSTER  (6 posts)

Mark Suster:  No Great Science to Determining Valuations

Mark Suster: Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster:  Be Leary of Too High a Price

Mark Suster:  Mark Suster: Valuation-What It Is & Its Ranges

Mark Suster:  Dilution Benchmarks & Fundraising

Mark Suster:  Fundraising Terms Pile Up with Later Stage Investors

 FRED WILSON  (6 posts)

Fred Wilson: Two Rules of Thumb for Early Stage Fundraising

Fred Wilson:  There's No Science to Early Stage Valuation

Fred Wilson:  An Option Pool is about Price 

Fred Wilson:  Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson: No One Gets More Diluted than the Founder

Fred Wilson:   The Valuation Environment is Tough Today

  

 

 

 

The Valuation Environment is Tough Today

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“It’s very competitive here [Silicon Valley]. [] Here [Silicon Valley] nobody is willing to take money on terms that are fair to both parties.  They’re willing to take money that’s fair to them, but not to me.” []

“It makes me nervous that we cannot find an investment in a Series A or B or C that is priced at a level that we really think is the right price, that makes me nervous. [] Most of the time it’s 50% higher, sometimes it’s double. [] It’s harder to make money in the venture business given the valuation environment that exists today.  It was a lot easier 5 or 10 years ago [].”  

This Week in Startups, Fred Wilson, episode # 523, Mar 10, 2015 @ approx. 35 min. [first quote] & 55 min. [second quote]

http://thisweekinstartups.com/fred-wilson-launch-festival/

No One Gets More Diluted than the Founders

Fred Wilson venture capitalist  and Co-Founder Union Square Ventures

 Wilson discusses employee equity and dilution in technology and high growth businesses.   

“If anyone goes to the pay window, everyone goes to the pay window. [from [] Jeff Minch, [] JLM [] an active commenter on the avc blog].”

“[] If you [] sold [your company] for $100 million and you and your co-founders are gonna make a bunch of money [] you really ought to make sure that every single person who was involved in making that success happen makes a bunch of money too.”

“[] nobody will get more diluted than [the co-founders] because [the co-founders] are there at the very beginning and the dilution will happen over time.  And the person or the investor who shows up at the very end of the process might never get diluted.  The person who was there at the very beginning gets diluted the most.” 

“[] The sooner you can stop talking about equity in percentages and start talking about it in dollars is the sooner that you are going to own more of your company than you would otherwise.” Fred Wilson  April 19, 2012  MBA Mondays Live: Employee Equity - Archive and Feedback- video;

http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html#disqus_thread

Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“I'm all about “back of the envelope”.  I am old school but these are my comfort zones:

Build product - raise [$] 600k at 3mm post [post-money valuation] 
Build usage - raise [$]1.8mm at 9mm post 
Build company - raise [$] 4mm at 20mm post

I am not in my comfort zone these days.” [Wilson was referring to valuation-wise late 2011 and presumably early 2012 as well.] Fred Wilson Burn rates: How Much?  Comments, Dec. 12,  2011; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

An Option Pool is about Price

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“One [] contentious [] negotiation [point] between an entrepreneur and a VC [], particularly [in] an early stage financing, is the inclusion of an option pool in the pre-money valuation. [] [The] fact [is an option pool] is simply about price.  [Example]:  [] $3.25mm pre-money with no option pool [can be equivalent to] $4mm pre-money with one. [] What an entrepreneur needs to do is find out what the market price for [his] company is with and without an option pool in the number. [Then], the negotiation over this point is [] less contentious.”

“[] [Wilson acknowledges that if] options are counted in the pre-money, entrepreneurs will want commensurately higher valuations to compensate for the additional dilution.”

“[][The] option pool request needs to be reasonable and based on [a] budget.  [Wilson looks for] enough options [in] the "pre-money pool" to fund the hiring and retention needs [] until the next financing.”  Wilson wants an option pool in the pre-money when he invests.  Fred Wilson, Valuation and Option Pool and comments, Nov. 6, 2009;  http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

There's No Science to Early Stage Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“There is no science to early stage valuation.  It’s simply a matter of supply and demand.  So generate a lot of demand and you'll get a good price.” Fred Wilson, Valuation and Option Pool comments, Nov 6, 2009;  http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

Two Rules of Thumb for Early Stage Fundraising

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[With a fast growing company], doubling employees year over year, adding users and customers [] very rapid[ly] [], [] don’t [] raise too much money.  [] [Otherwise] [the company] will be sitting on cash [] raised [at a lower valuation] [] [which is] too dilutive to [founders] and angels.

[Wilson has] two basic rules of thumb [for the amount to raise in early stages, i.e., seed, Series A and B rounds]. First try to dilute in the 10-20% band whenever you raise money.” 10% is preferable.  More may be necessary, “[] but try [] to keep [] dilution below 20% each round.  If you do two or three rounds [exceeding] 20% each round, you’ll end up with too little [equity].

Second, raise 12-18 months of cash each time you raise money.  Less than a year is too little. [] Longer than 18 months means you may [have cash when the company had at a lower valuation].

[] When [a] company gets above 100 employees and valued at north of $50mm, things change. You may need [] more cash [] for working capital [] and [the company] may not be increasing value [as rapidly as] when [it was] smaller.”  A raise of 24+ months cash may then be appropriate.  Fred Wilson, How Much Money To Raise, Jul 3 2011;  http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

 

Dilution Benchmarks & Fundraising

Mark Suster Partner Upfront Ventures and former entrepreneur

Negotiations between entrepreneurs and investors include dilution and other fundraising terms.  “[] the “fairway” of [investor’s equity] is 25-33% per round [i.e., entrepreneurs’ dilution]. [] If [the entrepreneur is] “super hot” or “super experienced”, [he] can end up with much less dilution –in some cases 12-15%.  But this is the exception, not the rule.”

“[] [These] dilution numbers don't take an option pool into account [].  Options are additional dilution.”

“[] [Valuation can be driven up] ONLY if there’s [] competition [for] a deal.  [Investors stay honest when entrepreneurs] talk with multiple parties.”

Fundraising also requires considering how many future rounds are needed and expected total future dilution.  It’s not an arbitrary spreadsheet-driven exercise reflecting attaining profitability.  It requires “understanding [industry norms necessary] to build a successful Internet business and where [the company falls] on that spectrum given [its business type].”   Mark Suster,  8 Questions to Help Decide if You Should be Raising Money Now, February 17, 2011 and comments;  http://www.bothsidesofthetable.com/2011/02/17/8-questions-to-help-decide-if-you-should-be-raising-money-now/

Mark Suster: Valuation-What It Is & Its Ranges

Mark Suster Partner Upfront Ventures and former entrepreneur

 “Valuation = whatever an investor is willing to pay. Investors want to own 25-33% so it can be determined by how much you raise. [] early investors know how much they want to invest and what the norms are by stages. There are huge variances (and prices go up and down dependent on market conditions), but general guidelines on valuation:

angel: sub $1m
seed $1-$2.5m pre [pre-money valuation]
A round: $2-5m pre. Up to $7-8m for super experienced entrepreneurs
B round $7-12m pre. Outliers can be $20m pre. EXTREME outliers (see: FourSquare) can fetch crazy prices.
C round: 100% dependent on company performance.”

Mark Suster comments from Want to Know How VC’s Calculate Valuation Differently from Founders?, July 22, 2010;  http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

Be Leary of Too High a Price

Mark Suster Partner Upfront Ventures and former entrepreneur

 “[] [Suster has] seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten [] [trapped] when [] markets correct and they got ahead of themselves [on inherent market valuation]. []

[It’s] OK to [] shoot for the “top end of normal” for the market conditions. [] [He] caution[s] entrepreneurs from [] raising money at significantly ABOVE market valuations. []

If [entrepreneurs] haven’t figured out product / market fit and therefore still have a highly risky business [they] run great risks for getting too far ahead [] on valuation. [] [Most] investors won’t want to [][do] a “down round,” which creates tension between them and early investors.

[] [Sophisticated] investors know [a major down round] is fool’s gold.  They get a cheaper price, [] wipe out much founder stock value and [] reissue [founders] new options. [Founders] take the money []” except their incentives get eliminated.

[] He advises “[] us[ing] competition to [][ensure] a fair price [and] rais[ing] a slightly higher round than [] [otherwise for some strategic reserve]. [] [One wants] to show an uptick in valuation [] for new investor confidence and to maintain [early investor relations].”  Mark Suster  Why Startups Should Raise Money at the Top End of Normal,  June 5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

No Great Science to Determining Valuations

Mark Suster Partner Upfront Ventures and former entrepreneur

 “There is no great science to [how prices (valuations) are determined].  The earlier [one] invest[s] the higher the chances the company won’t work out and thus [one] pay[s] a lower price than later-stage investors. [An investor tries] to pay the appropriate price for [his] perceived risks of the company succeeding and protect [himself  if] it isn’t quite as valuable as [he] had hoped.  As the risks [] get eliminated the higher the valuation investors are prepared to pay.”  These risks over time are “[first] product [], [then] market [], [then] growth/scale [] and [finally] monetization/competition [].”    Mark Suster, Why Startups Should Raise Money at the Top End of Normal  June  5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

Valuation is Temporary, Control is Forever

Naval Ravikant angel investor, Co-Founder AngelList and Venture Hacks and former entrepreneur

“Venture Hacks’ [] tagline was ‘Valuation is temporary, control is forever.’   It was all about [] mak[ing] sure [the entrepreneur] keep[s] control.  And if [the entrepreneur] ha[s] control then it’s [his] company.  And the day [the entrepreneur] loses control [] [he’s] an employee.”  Naval Ravikant, This Week in Startups: Naval Ravikant of AngelList - TWiST #244 Published on Apr 6, 2012,  @ 1:08 hrs http://www.youtube.com/watch?v=lWfGw7serN0

Strategic Value Increases Valuation

Basil Peters angel investor and Principal Strategic Exits Corporation

Illuminating strategic value of an acquisition target can increase valuation.  “The only reason any company buys another company is because [it believes it] can increase the value of the company being acquired, and/or the acquired company will increase [its own value]. [] The most successful company sales [result in] the combination of the two businesses increas[ing] the total business valuation faster than either company could achieve alone. []

[Strategic value increases business valuation by] reducing competition [] [and/or cross selling or promotion of] complementary products or services. [] [Also an acquirer] that would like to develop a similar product or service [] will [often] pay to reduce []‘time to market’, [] [so] being fast is often better than being good.”  Incremental strategic value can show why “the business is worth more to [the prospective buyer] than to another bidder”, which drives why he’ll often pay more.  Basil Peters,  Illuminating Strategic Value When You Sell a Business,  August 1, 2009; http://www.exits.com/blog/illuminating-strategic-value-when-you-sell-a-business/

How to Maximize the Selling Price

Basil Peters angel investor and Principal Strategic Exits Corporation

 “There are several ways to maximize the final selling price [exit value]: 1. Structural value increase  2. Illuminating strategic value 3. Capitalizing on Inefficient Markets  4. Maintaining multiple bidders 5. Sales and negotiating skill.    

Structural value increase often [] can increase the final selling price by 10 to 15% [and] can be balance sheet changes, asset vs. share sales [etc.]. 

Illuminating strategic value [] often creates the largest fundamental increase in selling price.  It’s not actually creating strategic value, it usually has to be there already. [It] very often has to be illuminated for the potential buyers [].

Capitalizing on inefficient markets.  Markets for selling a business, especially for under $100M are very inefficient:  Information is difficult to access, there are [few] buyers, the market is illiquid [and] often very few[are] for sale [] [which favors sellers]. 

Always have multiple bidders [] to improve the probability of closing [and] to maximize the price. [Three is optimal.] 

Selling and negotiating skill [] can increase the final price by 50% or more.

[] When the exit process is well planned and professionally executed[,]  the exit date and exit valuation are both reasonably predictable.”  Basil Peters, Maximizing Exit Value, Angel Capital Association Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf-  pg 18-25

When Can You Sell?

Basil Peters angel investor and Principal Strategic Exits Corporation

“When can [one] sell? [] [With] M&A [merger & acquisition] exits [] the real threshold is to ‘prove the business model’. [To prove the model] [] a recurring revenue business [] [should show] actual results for: revenue per customer, gross margin per customer, customer lifetime (or churn [i.e., how long one enjoys that customer]) [and] cost of customer acquisition.  In other words, how much is a customer worth and what do[es] [a customer] cost to acquire?

[With that proven model], [] credible projection[s] [can be built] that [show] if: new owners added $X millions of capital, the business would have Y customers and be worth $Z millions.

That’s when [one] can sell [although] there are often additional factors like competitors and market changes. [] As soon as [one] prove[s] the model is often the best time to sell.  [It’s] always best to sell on an upward trend. Sell[ing] on the promise, not the reality [is] often when [one] [gets] the best price.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf , pg 5-10

Angels Need a 20-25%/yr Return

Basil Peters angel investor and Principal Strategic Exits Corporation

“[] angels need to get 20% to 25% per year [] the same [return] as a venture fund.  So, if you do the math, [] angels need to make three to five times their money in three to five years.”    Basil Peters, Seed Capital From Angel Investors: Basil Peters, CEO and Fund Manager, Fundamental Technologies II (Part 5);  Jul 7, 2010;  http://www.sramanamitra.com/2010/07/07/seed-capital-from-angel-investors-basil-peters-ceo-and-fund-manager-fundamental-technologies-ii-part-5/

Why VC's Block an Exit

Basil Peters angel investor and Principal Strategic Exits Corporation

“Most entrepreneurs don’t even know that a VC is likely to block an exit when they accept the VC’s money. [] VCs design their investment agreements to give them the power to block exits.”

“[] VCs will almost always block a sale where they only make a 3-4X return on their investment.  This could have easily been a 10X return for the angels and a 100X return for the entrepreneurs.

[] The winners [must] produce at least 10-30X return for the [VC] fund to perform respectably.

[] This propensity to block exits is one of the reasons that every company needs a clear exit strategy before [it approaches its] first investor.”  Basil Peters, How VCs Block Exits, August 28, 2010, http://www.exits.com/blog/how-vcs-block-exits/; Why VCs Will Block Good Exits;  http://www.angelblog.net/Why_VCs_Block_Good_Exits.html