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> So if some of the super-angels were looking for companies that could get acquired quickly, that would explain why they'd care about valuations. But why would
by csallen 16y ago
> So if some of the super-angels were looking for companies that could get acquired quickly, that would explain why they'd care about valuations. But why would they be looking for those? Because depending on the meaning of "quickly," it could actually be very profitable. A company that gets acquired for 30 million is a failure to a VC, but it could be a 10x return for an angel, and moreover, a quick 10x return. Rate of return is what matters in investing—not the multiple you get, but the multiple per year. If a super-angel gets 10x in one year, that's a higher rate of return than a VC could ever hope to get from a company that took 6 years to go public.
Very true, but this model doesn't seem sustainable to me, unless I greatly underestimate the number of companies that could provide that "quick 10x return" (or unless the amount of money invested remains small and constant year-to-year).
Imagine you start with $10M in investments this year and make 10x. To make the same return next year, you've gotta find enough companies capable of a 10x return to invest all $100M you now have. Should you succeed, the following year you'd have $1B to invest. In a very short amount of time, your limiting factor switches from the amount of money you have to invest to the number of quality companies you can find to invest in.
It seems their rate of return is going to significantly decrease, year after year, until they're forced to change their strategy to one more in line with what the VCs are doing.
- hitonagashi 16y agoThat assumes that every valuation is aiming for the 'quick buck', the x10 return. It could be that if the angels are less certain of whether a company can balloon, they demand the more exact valuation in the theory of making that a x10 portfolio member..
- brk 16y agoThe scenarios are greatly simplified here, so it's hard make direct comparisons. But, on the surface it sounds like you're assuming the investment size stays relatively constant. You might invest $10M in a web-type startup this year, and $1B in a radical new solar panel manufacturing facility 2 years later that promises to halve the price of solar-watts, etc. It also assumes that everyone wants to reinvest 100% every year, you'd get some investors who would be happy to just make back the $20M they lost in another market, and not keep doubling down. So, I think the model is sustainable for longer than you might first guess.
- metageek 16y agoExcuse me, I went to upvote this, missed, and downvoted it instead. Sorry.
- greendestiny 16y agoThat's assuming every single one of your investments gets 10x. Any kind of very naive exponential assumptions are going to look silly quite quickly. Besides other people would be willing to take on those investments even if they are too small for these incredibly lucky super angels.
- csallen 16y agoWell, it's assuming your investments average 10x yearly. Of course some will tank and some will get more than 10x. But my point is that, over 6 years, you won't be able to get 10^6, or really anywhere near that, because: (1) That would require re-investing all your returns, and as PG mentioned most of them have to go back to your limited partners. (2) Even if you could re-invest all your returns, it would be impossible to maintain an average of 10x yearly with that much money. So the super angels can't really expect to find phenomenal success by just looking for quick exits. They need big exits too. Which means caring more about finding winners and less about valuations.
- pg 16y agoYou wouldn't reinvest all your returns. You'd distribute most of them to your limited partners (the people who supplied the money).
- csallen 16y agoRight. I guess what I wanted to point out is that you may be overestimating the super angels' strategy and the returns VCs would have to get to compete ("10^6—one million x"). If the super angels can't reinvest all their returns, they won't actually make anywhere near that much. Even if they could reinvest it all, their returns would diminish each year. So the question is, how much will they make with their current strategy? I don't know enough about the relevant numbers to do anything more than speculate. But if I had to, I'd bet the super angels are better off focusing on finding big winners than they are worrying about valuations and quick returns.