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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 cert

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.
  - buescher 5y ago
    Yes. If you take on a large valuation, you take on the responsibility of generating a return on it. Go figure. You are making a funny but you are not exactly wrong: yes, you should be looking for investment deals where you are likely to get a return on your investment.

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.
- buescher 5y ago
  Yes. If you take on a large valuation, you take on the responsibility of generating a return on it. Go figure. You are making a funny but you are not exactly wrong: yes, you should be looking for investment deals where you are likely to get a return on your investment.