As Angel Investors Pull Back, Valuations Take a Hit

Median income does not mean what you think it means.

There are basically 4 socioeconomic classes in modern society: the disposessed, the working poor, the middle class and the wealthy class. You can split hairs and make different cuts, but if you follow this model.

* The disposessed is the people that fell through the cracks. They are struggling to survive usually for multiple issues that are holding them back, even if they have incomes. In a healthy society they should be a small minority.

* The working poor is the people that manage to make ends meet, but are one unexpected big expense away from financial disaster. Unlike the dispossesed their main problem is that the jobs they are qualified to hold do not pay enough, so they may do everything right and still land in trouble.

* The middle class is people that is financially relaxed, even if not rich. They can afford luxuries, and are the prefered target market for many business both because there are many of them and because they have disposable incomes.

* The wealthy run the show. They are not relevant to this dicussion.

The point about "median income" rethoric is that Americans assume the middle class is always 50% or more of the population. So, by definition, median income == middle class. This is not the standard way of things around the world or through American history. Instead, there was an historic anomaly after WWII, when all the other industrial economies were blown up during the war and Americans enjoyed the advantage of being isolated enough to keep their infrastructure mostly intact. Every Risk player knows how this go.

This allowed the American economy to grow faster than population during the second half of 20th century, so most people could aspire to join the middle class, and the upper tiers of middle class could aspire to join the whealty class.

Arguably, the oversupply of money in the Bay Area is reverting this trend. This is what happened to Spain in the 17th and 18th century. The country itself got rich because of all the resources they extracted from their colonies in the Americas, but the rest of their economy did not grow as fast.

The result is that everyone that was not connected to the gravy train from overseas was, in effect, poor... even if they had enough money on their pockets to qualify as well to do in places like Central Europe that did not have colonies of their own. The well-off German farmer had access to cheap food, shelter, craft goods and the occasional specialized service that were simply not available to the average Spaniard lackey, because those last were priced out of the market by the soldiers and the customs officers.

Now the colonies are in the cloud, and software developers are the workers that help bring the value produced there into the realm of physical reality.

I kinda side with Ron Conway on valuations. His take that valuations are not that important and company's success is mostly binary seems like common sense. Never understood the haggling that goes on over a few million when the exit could potentially be counted in the billions.

Here is a link -- http://blogs.wsj.com/venturecapital/2010/10/18/ron-conways-b...

It took me a long time to figure this out, because no one tells you, but it's actually very simple. There are two ways people raise money in Silicon Valley:

1. Traction (rapid week-over-week growth, significant press)

2. Reputation (elite background, connections)

It's very easy to get some initial traction for these local services businesses, so investors fall for them easily. They lose money on every transaction but will make it up in volume ala Kozmo.com, Pink Dot, etc.

Despite the fairytales, no one actually invests in technology startups based on their products in Silicon Valley. Really, no one.

Oculus VR is a great example of the kind of business that investors had no interest in. They reluctantly jumped on the bandwagon very late, and only after it had lots of traction. Very few investors were interested in SpaceX or Tesla. That's how bad Silicon valley investors are at what they do. It's an industry ripe for disruption (see: YC).

+1 (as a founder, too).

The obvious things: traction, good business plan, viable market, reputation/track record, team, etc. help. But luck and hustle are required, too.

No, a valuation is pretty much meaningless without the context of the terms for the deal.

One of the most important clauses is the liquidation preference. There are many others.