Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Squaring Venture Capital Valuations with Reality

papers.ssrn.com

Post reply on HN
Print view View original

31–40 of 48 posts

Re: Squaring Venture Capital Valuations with Reality

#31

Post by lnanek2 »

cma wrote: post #29

I was always confused by this response: > pg: "Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that. I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly." https://news.ycombinator.co…

That's how I feel about it as an employee. If the startup doesn't do well my equity is worthless anyway, so I don't really care if it is a clean round or lots of tricks to get the valuation/share price up like that by promising investors more preference when it doesn't do well.

Re: Squaring Venture Capital Valuations with Reality

#32

Post by stanleydrew »

lnanek2 wrote: post #31
cma wrote: post #29

I was always confused by this response: > pg: "Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that. I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly." https://news.ycombinator.co…

That's how I feel about it as an employee. If the startup doesn't do well my equity is worthless anyway, so I don't really care if it is a clean round or lots of tricks to get the valuation/share price up like that by promising investors more preference when it doesn't do well.

This is pretty short-sighted though. The definition of "doing well" is relative to the last round's valuation, regardless of business fundamentals.

So if your company is actually worth $100M, but you raise $150M at a $1B valuation with a 1x preference, you would get nothing if the company sells for $150M later that year. That would have been a 50% return on the actual true company valuation, had you actually raised at that.

This is an extreme example but hopefully you get what I'm saying.

Re: Squaring Venture Capital Valuations with Reality

#33

Post by nurettin »

Reminds me of the over-inflated house prices of Istanbul. (300% increase over the course of 5 years)

Perhaps prices aren't as dependent on "complex stock mechanics" as it is dependent on supply/demand. Demand being made up of increasing levels of wealth (or credit) and supply being made up of pure greed.

Re: Squaring Venture Capital Valuations with Reality

#34

Post by sseveran »

lnanek2 wrote: post #31
cma wrote: post #29

I was always confused by this response: > pg: "Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that. I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly." https://news.ycombinator.co…

That's how I feel about it as an employee. If the startup doesn't do well my equity is worthless anyway, so I don't really care if it is a clean round or lots of tricks to get the valuation/share price up like that by promising investors more preference when it doesn't do well.

The employees of Good Technology would most likely beg to differ.

https://venturebeat.com/2016/01/11/after-good-technologys-42...

Re: Squaring Venture Capital Valuations with Reality

#37

Post by robocat »

stanleydrew wrote: post #32
lnanek2 wrote: post #31

Earlier quoted context omitted.

That's how I feel about it as an employee. If the startup doesn't do well my equity is worthless anyway, so I don't really care if it is a clean round or lots of tricks to get the valuation/share price up like that by promising investors more preference when it doesn't do well.

This is pretty short-sighted though. The definition of "doing well" is relative to the last round's valuation, regardless of business fundamentals. So if your company is actually worth $100M, but you raise $150M at a $1B valuation with a 1x preference, you would get nothing if the company sells for $150M later that year. That would have been a 50% return on the actual true company valuation, had you actually raised a…

In your example the company has lost $100M, not gained 50%...

E.g. company has $100M cash and no other assets, receives $150M cash, then later sells company for $150M.

Re: Squaring Venture Capital Valuations with Reality

#38

Post by prostoalex »

std_throwaway wrote: post #35

It's not overvalued if people are still paying the price. Only the last fool in a long line will get hurt.

The last fool is likely to be some guy who eats and breathes finance. The last fool who did not negotiate liquidation preferences, ratchet provisions and a board seat will get hurt, though.

Re: Squaring Venture Capital Valuations with Reality

#39

Post by linkregister »

indescions_2017 wrote: post #16

Of equal interest is author's other paper entitled "How Do Venture Capitalist's Make Decisions?" And after 900+ interviews it's neither jockey nor horse nor any other correlation, but spray and pray all around. Am currently negotiating a small ($10k) angel investment in an ecommerce startup in Indonesia. All "go" signals are there: ambitious team, growing market, outside foreign investment, etc. But as far as calcula…

> The fact that in Jakarta you can hire a fresh, world-class engineering graduate for $500 a month to come work for you!

That's nuts, considering English teachers make about $1000 per month. Then again, there's such a dearth of opportunity for talent in Indonesia that I don't doubt your figure at all. I can't count how many engineering graduates from Bandung I met who are low-skilled office or vocational careers.

I noticed you didn't mention government connections to the startup. At some point they need to either pay unsustainable bribes or call a highly-placed friend or relative to stay in business, or so I have been led to believe.

Jakarta is an amazing city. I would love to use a product developed in Indonesia. I hope to see that startup's Show HN sometime soon.

Re: Squaring Venture Capital Valuations with Reality

#40

Post by dieterrams »

ingenuous2 wrote: post #28
cshenton wrote: post #27

Earlier quoted context omitted.

50% seems like pretty optimistic odds for an angel investment.

in general, but with just a $10k angel, the odds of becoming a $100k company are pretty decent.

A $100k company could only be a 10x return for a $10k investment if that investment was for 100% of the company.
Post reply on HN