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The deal terms for unicorn investment rounds are less about company fundamentals, and more about the scarcity of great startups. There's more money than there

The deal terms for unicorn investment rounds are less about company fundamentals, and more about the scarcity of great startups. There's more money than there are good deals in Silicon Valley, so later stage investors are forced to offer more money for less equity in order to beat other term sheets. This ends up looking like sky-high valuations, since investors that offer fair-market-valuations are unlikely to get picked. Founders naturally gravitate towards minimizing dilution.

johan_larson 9y ago
There's more money than there are good deals in Silicon Valley, ... Is that true? VCs aren't acting the way they would if they really believed it. If they did, they would refuse funds from potential LPs, since they really can't find professionally responsible places to invest it. But that's not what they do. Alternately, they might take the LPs' money, warn them carefully that they could be investing in some real longshots, and then be willing to invest on fairly generous terms in any number of startups that look to be competently run and pursuing plausible opportunities. But that's not what they do, either. Something doesn't add up.
- moxious 9y ago
  The VCs of course need to maintain return but they are under some pressure to push money out the door and invest, as their fee is a percentage of funds invested. There are many funds structured in a way where it's better for the fund (not necessarily for the investor) to invest 2x in questionable companies, than just 1x in great companies, lest they lose fees on the remainder.
- hectorr 9y ago
  The 2 is more important than the 20.
zxcmx 9y ago
Or more generally, "welcome to the over-valuation of every asset class". Cryptocurrencies, housing, various kinds of stocks - there's more money than ever in the world, all of it chasing a return. More complex packaging is part of it (think confusopoly of mobile plans applied to investing) and I think the paper has useful advice for "non preferential" investors, but it's not the whole story.
- xchaotic 9y ago
  Well, if every asset class was equitably 'overvalued' then we are at an equilibrium and there's no problem.
  - loopdedoo 9y ago
    Is this different from inflation at all?
    - Terr_ 9y ago
      I think the difference is that inflation also involves goods that are consumed or desired for their direct utility. Not just "stuff I can resell for more later."

johan_larson 9y ago

There's more money than there are good deals in Silicon Valley, ... Is that true? VCs aren't acting the way they would if they really believed it. If they did, they would refuse funds from potential LPs, since they really can't find professionally responsible places to invest it. But that's not what they do. Alternately, they might take the LPs' money, warn them carefully that they could be investing in some real longshots, and then be willing to invest on fairly generous terms in any number of startups that look to be competently run and pursuing plausible opportunities. But that's not what they do, either. Something doesn't add up.

moxious 9y ago
The VCs of course need to maintain return but they are under some pressure to push money out the door and invest, as their fee is a percentage of funds invested. There are many funds structured in a way where it's better for the fund (not necessarily for the investor) to invest 2x in questionable companies, than just 1x in great companies, lest they lose fees on the remainder.
hectorr 9y ago
The 2 is more important than the 20.

zxcmx 9y ago

Or more generally, "welcome to the over-valuation of every asset class". Cryptocurrencies, housing, various kinds of stocks - there's more money than ever in the world, all of it chasing a return. More complex packaging is part of it (think confusopoly of mobile plans applied to investing) and I think the paper has useful advice for "non preferential" investors, but it's not the whole story.

xchaotic 9y ago
Well, if every asset class was equitably 'overvalued' then we are at an equilibrium and there's no problem.
- loopdedoo 9y ago
  Is this different from inflation at all?
  - Terr_ 9y ago
    I think the difference is that inflation also involves goods that are consumed or desired for their direct utility. Not just "stuff I can resell for more later."