4 ms·

Why Valuations Are Getting Too High for Seed Stage Investors

30 points by Cmccann7 15y ago

pg 15y ago
He shouldn't use that $22 million average value for these calculations. It's based on current values of often quite young startups, not exit values. As I say in the post, "unless the top VC funds as a whole lose money, this number should be a lower bound on actual exit valuations." His math also assumes you invest randomly in YC startups. Any angel who was paying attention ought to be able to narrow the field a lot, which would justify proportionally higher valuations.
- chrisyeh 15y ago
  Paul's right that the $22 million average may end up being conservative. All it takes is for another round to increase the Dropbox valuation, which could have a significant impact on the total. But I think it quite likely that many VCs will end up losing a lot of money on recent investments.
  - deleted 15y ago
    [deleted]
- seats 15y ago
  PG, clearly you are an apologist for YC and that's totally fine, but his post is broader than YC. I disagree that any angel 'who is paying attention' can narrow the field. In fact I would say any angels who want to have skin in the game have to just get in line, and the line is long, especially to invest in any YC company. Bottom line is that there is too much risk capital at play right now. Valuations are high and by definition returns on average are going to be low. For the mediocre and lower funds and investors they may be worse than low. YC will do just fine. The good YC startups will do just fine, but the marginal angel investor is probably not making smart investments right now. Good time to be a startup raising seed and early stage but a bad time to be on the other side of that equation.
- drusenko 15y ago
  what if you released the data for the first 4 years (2005-2009)? given a couple years to mature, the average value per startup would be significantly higher. not an exit value, but certainly a much better approximation.
johnrob 15y ago
It seems like angel investing really only makes sense these days if you do it as option on future investment. Given how valuations are avoided until Series A, the angels end up buying at only a modest discount off the VC price. I recently saw a small angel try to invest 50k in a startup, only to back out once he realized how much equity it would end up getting him. A larger angel could always add additional money during the Series A to end up with a larger chunk of the then more promising company.
- joshu 15y ago
  Why would an angel care how much of the company he gets? The only thing that matters is absolute return. Btw on hot deals (the kind you would want to take your prorata on) you are frequently asked not to take it so the new investor can get the percentage they need. So you can't "always" get more ownership.
sillybee 15y ago
Chris is a nice guy, but he's extremely price sensitive. He likes to invest $10k in companies valued at less than $3m pre, but only after many meetings.
- chrisyeh 15y ago
  Sillybee is absolutely right--I warn everyone that I am valuation sensitive, and that I'm not as aggressive as other angels.
iamelgringo 15y ago
Today, the same conditions no longer apply. Pre-product startups with novice founders are getting $8 million pre-money valuations. With all due respect, Chis. But, if you're looking at pre-product startups asking for a $8M pre, you're looking in the wrong places for startups. Those valuations are the exception, not that rule. And, the problem with publishing those figures, is that entrepreneurs scratch their heads and wonder why they aren't getting those valuations. Those valuations only happen for a handful of companies at the top of YC graduating classes, where investor appetite has been deliberately whipped into a frenzy. There are plenty of other quality startups in the Valley with solid products and revenue that have to pitch 170 times to raise $1M: http://www.brendanbaker.co/2011/04/anatomyofseed/ http://www.brendanbaker.co/2011/04/anatomyofseed/
rdl 15y ago
What I don't understand is why people complain about valuations being too high/out of line with what they want, and just complain (or try to pick only "cheap" deals), vs. increasing the value they add to transactions. YC adds huge value to transactions, and gets deal terms which, from any non-value-add investor, would be extortionate. C and D list VCs add no value (and may actively destroy it), and a lot of them aren't even allowed into top deals. For other deals, they sometimes get to fill out a round ("fill out" a round where you've raised $800k on a goal of "raising $1mm round" but actually wanted to and end up raising $2mm"). If I were investing, I'd rather either build my personal network (and thus get into deals earlier and on more favorable terms; a few months early on a seed round might mean you actually do get to invest in the next PayPal or Google), or get really well known in a niche (Big Data, online payments, etc.) to concentrate value-add. Then, you get access to the hottest deals in that space, where the valuation is less critical, AND you might get in earlier (and thus get better terms). Or, if you believe the seed/A valuations are too close, you might get to invest $50-100k right before the A round, thus not having much risk. It seems like the smaller angels are much more focused on the cost to get into deals, whereas the best investors are more focused on making sure they get access to the top 1% of deals. Paying 50% more on every investment you make is still better than missing the 1-5% of investments which make all your money.

30 points by Cmccann7 15y ago

pg 15y ago

He shouldn't use that $22 million average value for these calculations. It's based on current values of often quite young startups, not exit values. As I say in the post, "unless the top VC funds as a whole lose money, this number should be a lower bound on actual exit valuations." His math also assumes you invest randomly in YC startups. Any angel who was paying attention ought to be able to narrow the field a lot, which would justify proportionally higher valuations.

chrisyeh 15y ago
Paul's right that the $22 million average may end up being conservative. All it takes is for another round to increase the Dropbox valuation, which could have a significant impact on the total. But I think it quite likely that many VCs will end up losing a lot of money on recent investments.
- deleted 15y ago
  [deleted]
seats 15y ago
PG, clearly you are an apologist for YC and that's totally fine, but his post is broader than YC. I disagree that any angel 'who is paying attention' can narrow the field. In fact I would say any angels who want to have skin in the game have to just get in line, and the line is long, especially to invest in any YC company. Bottom line is that there is too much risk capital at play right now. Valuations are high and by definition returns on average are going to be low. For the mediocre and lower funds and investors they may be worse than low. YC will do just fine. The good YC startups will do just fine, but the marginal angel investor is probably not making smart investments right now. Good time to be a startup raising seed and early stage but a bad time to be on the other side of that equation.
drusenko 15y ago
what if you released the data for the first 4 years (2005-2009)? given a couple years to mature, the average value per startup would be significantly higher. not an exit value, but certainly a much better approximation.

johnrob 15y ago

It seems like angel investing really only makes sense these days if you do it as option on future investment. Given how valuations are avoided until Series A, the angels end up buying at only a modest discount off the VC price. I recently saw a small angel try to invest 50k in a startup, only to back out once he realized how much equity it would end up getting him. A larger angel could always add additional money during the Series A to end up with a larger chunk of the then more promising company.

joshu 15y ago
Why would an angel care how much of the company he gets? The only thing that matters is absolute return. Btw on hot deals (the kind you would want to take your prorata on) you are frequently asked not to take it so the new investor can get the percentage they need. So you can't "always" get more ownership.

sillybee 15y ago

Chris is a nice guy, but he's extremely price sensitive. He likes to invest $10k in companies valued at less than $3m pre, but only after many meetings.

chrisyeh 15y ago
Sillybee is absolutely right--I warn everyone that I am valuation sensitive, and that I'm not as aggressive as other angels.

iamelgringo 15y ago

Today, the same conditions no longer apply. Pre-product startups with novice founders are getting $8 million pre-money valuations. With all due respect, Chis. But, if you're looking at pre-product startups asking for a $8M pre, you're looking in the wrong places for startups. Those valuations are the exception, not that rule. And, the problem with publishing those figures, is that entrepreneurs scratch their heads and wonder why they aren't getting those valuations. Those valuations only happen for a handful of companies at the top of YC graduating classes, where investor appetite has been deliberately whipped into a frenzy. There are plenty of other quality startups in the Valley with solid products and revenue that have to pitch 170 times to raise $1M: http://www.brendanbaker.co/2011/04/anatomyofseed/ http://www.brendanbaker.co/2011/04/anatomyofseed/

rdl 15y ago

What I don't understand is why people complain about valuations being too high/out of line with what they want, and just complain (or try to pick only "cheap" deals), vs. increasing the value they add to transactions. YC adds huge value to transactions, and gets deal terms which, from any non-value-add investor, would be extortionate. C and D list VCs add no value (and may actively destroy it), and a lot of them aren't even allowed into top deals. For other deals, they sometimes get to fill out a round ("fill out" a round where you've raised $800k on a goal of "raising $1mm round" but actually wanted to and end up raising $2mm"). If I were investing, I'd rather either build my personal network (and thus get into deals earlier and on more favorable terms; a few months early on a seed round might mean you actually do get to invest in the next PayPal or Google), or get really well known in a niche (Big Data, online payments, etc.) to concentrate value-add. Then, you get access to the hottest deals in that space, where the valuation is less critical, AND you might get in earlier (and thus get better terms). Or, if you believe the seed/A valuations are too close, you might get to invest $50-100k right before the A round, thus not having much risk. It seems like the smaller angels are much more focused on the cost to get into deals, whereas the best investors are more focused on making sure they get access to the top 1% of deals. Paying 50% more on every investment you make is still better than missing the 1-5% of investments which make all your money.