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>Steve focused his gaze on me and asked, “how much is your revenue?” And also, “what was your last financing valuation?” >I replied that our last round had bee

>Steve focused his gaze on me and asked, “how much is your revenue?” And also, “what was your last financing valuation?” >I replied that our last round had been two years earlier, pre-launch, at a $50M valuation. >Steve said, “we’d probably acquire you for $50 million.” My heart sank. I couldn’t imagine telling our team that their years of work had created no new value. The biggest mistake was conflating valuation on paper with liquid value. The team’s years of work had turned an entirely theoretical $50M into $50M in cash. The value created was $50M minus however much the funders actually gave the company. As an extreme example, suppose I offer to buy a one billionth share of a startup for $1 today, thereby giving the startup a $1B valuation on paper. It would be insane to call it a failure if that startup actually managed to sell itself for $1B or even $500M two years down the road.

kovek 5y ago
This is the discussion I’m curious about. Is there some theory around valuing something? Are we declaring that a company will be worth X Net capital in Y years? Actually, I believe investors try to maintain a P/E of around 15 (or 20-30 these days?). So, the question “how much is your revenue?” makes sense, which we don’t know if it was answered by iLike. Another question is, what will the employees pursue once they know that their acquisition strategy will not work? I’m sure the employees are skilled, so I would hope they have an alternative: 1. pivot, 2. Show off their achievements when applying to other companies
buescher 5y ago
But then your dollar, two years down the road, is worth... $1 or even $0.50. Smells like failure to me, except to those who paid less than $0.50 for their shares. Would you invest with them again?
- MontyCarloHall 5y ago
  From the company’s perspective, either case is a success story: you walk away with $999,999,999 or $499,999,999.50. From the investor’s perspective, while certainly not a resounding success, not necessarily an abject failure either. Perhaps in those two years the nature of the market the company competes in becomes clear and the investor realizes that they had grossly overvalued the company. Perhaps the company is actually worth $10. Then, by some miracle, someone offers to buy the company at something close to its initial overvaluation. Breaking even or even losing 50% of your investment is preferable to losing 100% of it. In this particular case, given that both Apple and Facebook were both able to implement this company’s entire product in a matter of weeks, I’d say the investor’s initial valuation was inflated, and they should have been happy to break even.
  - buescher 5y ago
    No, from the company's perspective, it is not a success. The company's purpose is to generate a return for their shareholders. In this context, that means an exit over their last valuation. Not over zero, not just good for the founders, not just what they were really worth after all, sucks to have belived the pitch deck, too bad if you invested in the last round. The investor's initial valuation was inflated because the company failed to develop anything that would be worth an exit appropriate to that valuation.
    - MontyCarloHall 5y ago
      >The company's purpose is to generate a return for their shareholders Absolutely correct, but who are the shareholders? If the investor owns less than half of the company, then the majority of the shareholders comprise the founder and employees, who would come out way ahead selling their company at initial valuation. As you said, the goal of a company is to maximize all shareholders’ returns, not just the investor’s return. > The investor's initial valuation was inflated because the company failed to develop anything that would be worth an exit appropriate to that valuation. Why is the investor faultless here? Valuation could just as easily have been inflated because the investor failed to do proper due diligence in accurately estimating how much the company is truly worth.
      - buescher 5y ago
        OK, you're a minority shareholder in a company and the founder screws you on the exit. This does happen. It can be perfectly legal. There's an illuminating and apropos anecdote about Steve Jobs and Pixar in Charles Ferguson's High Stakes, No Prisoners that I haven't seen printed elsewhere that might even be true. Do you ever invest in one of his ventures again? The idea that the investor is at fault if he gets hoodwinked is logic of the con man though: the mark is equally at fault!!!
    - hnfong 5y ago
      By your definition, over-valued companies would be destined for failure, through no fault of company executives but poor judgement on the investor's part. A corollary is that the company's founders would be way more "successful" raising money from investors who value their company least. PS: In case you are running a startup, consider selling me 10% of your shares for $1, so that you'll look successful a couple years later as long it hasn't gone bust yet.
- onion2k 5y ago
  As much as we celebrate success on HN, it's always worth remembering that it's a lot easier to lose in business. You can have year after year after year of wins, but one big loss will sink your company. Most investors get into a company expecting a high probability of losing their money. They invest on the basis that they'll get it right and make a significant profit every few deals, not that they'll win every time. Coming to a deal to sell to Apple (in the face of losing everything by having Apple and FB eat your lunch) at the same valuation as 2 years prior is absolutely not a failure event. It's a huge win. Practically every investor would invest again.
  - buescher 5y ago
    Yup, and a loss is called a loss, not a gain. When you invest, you are dealing in probabilities and potentialities. When you exit, you are dealing with actualities. When you actually lose money, it is one of your failures, not one of your successes. I think what actually happened was the deal fell through and Apple ate their lunch anyway, right? What do you call that?

kovek 5y ago

This is the discussion I’m curious about. Is there some theory around valuing something? Are we declaring that a company will be worth X Net capital in Y years? Actually, I believe investors try to maintain a P/E of around 15 (or 20-30 these days?). So, the question “how much is your revenue?” makes sense, which we don’t know if it was answered by iLike. Another question is, what will the employees pursue once they know that their acquisition strategy will not work? I’m sure the employees are skilled, so I would hope they have an alternative: 1. pivot, 2. Show off their achievements when applying to other companies

buescher 5y ago

But then your dollar, two years down the road, is worth... $1 or even $0.50. Smells like failure to me, except to those who paid less than $0.50 for their shares. Would you invest with them again?

MontyCarloHall 5y ago
From the company’s perspective, either case is a success story: you walk away with $999,999,999 or $499,999,999.50. From the investor’s perspective, while certainly not a resounding success, not necessarily an abject failure either. Perhaps in those two years the nature of the market the company competes in becomes clear and the investor realizes that they had grossly overvalued the company. Perhaps the company is actually worth $10. Then, by some miracle, someone offers to buy the company at something close to its initial overvaluation. Breaking even or even losing 50% of your investment is preferable to losing 100% of it. In this particular case, given that both Apple and Facebook were both able to implement this company’s entire product in a matter of weeks, I’d say the investor’s initial valuation was inflated, and they should have been happy to break even.
- buescher 5y ago
  No, from the company's perspective, it is not a success. The company's purpose is to generate a return for their shareholders. In this context, that means an exit over their last valuation. Not over zero, not just good for the founders, not just what they were really worth after all, sucks to have belived the pitch deck, too bad if you invested in the last round. The investor's initial valuation was inflated because the company failed to develop anything that would be worth an exit appropriate to that valuation.
  - MontyCarloHall 5y ago
    >The company's purpose is to generate a return for their shareholders Absolutely correct, but who are the shareholders? If the investor owns less than half of the company, then the majority of the shareholders comprise the founder and employees, who would come out way ahead selling their company at initial valuation. As you said, the goal of a company is to maximize all shareholders’ returns, not just the investor’s return. > The investor's initial valuation was inflated because the company failed to develop anything that would be worth an exit appropriate to that valuation. Why is the investor faultless here? Valuation could just as easily have been inflated because the investor failed to do proper due diligence in accurately estimating how much the company is truly worth.
    - buescher 5y ago
      OK, you're a minority shareholder in a company and the founder screws you on the exit. This does happen. It can be perfectly legal. There's an illuminating and apropos anecdote about Steve Jobs and Pixar in Charles Ferguson's High Stakes, No Prisoners that I haven't seen printed elsewhere that might even be true. Do you ever invest in one of his ventures again? The idea that the investor is at fault if he gets hoodwinked is logic of the con man though: the mark is equally at fault!!!
  - hnfong 5y ago
    By your definition, over-valued companies would be destined for failure, through no fault of company executives but poor judgement on the investor's part. A corollary is that the company's founders would be way more "successful" raising money from investors who value their company least. PS: In case you are running a startup, consider selling me 10% of your shares for $1, so that you'll look successful a couple years later as long it hasn't gone bust yet.
onion2k 5y ago
As much as we celebrate success on HN, it's always worth remembering that it's a lot easier to lose in business. You can have year after year after year of wins, but one big loss will sink your company. Most investors get into a company expecting a high probability of losing their money. They invest on the basis that they'll get it right and make a significant profit every few deals, not that they'll win every time. Coming to a deal to sell to Apple (in the face of losing everything by having Apple and FB eat your lunch) at the same valuation as 2 years prior is absolutely not a failure event. It's a huge win. Practically every investor would invest again.
- buescher 5y ago
  Yup, and a loss is called a loss, not a gain. When you invest, you are dealing in probabilities and potentialities. When you exit, you are dealing with actualities. When you actually lose money, it is one of your failures, not one of your successes. I think what actually happened was the deal fell through and Apple ate their lunch anyway, right? What do you call that?