5 ms·

I'm a seed stage VC. Reposting my thoughts on this from twitter: YC invests at $2m valuations, so Paul's take is very logical. This won't apply to startups rai

I'm a seed stage VC. Reposting my thoughts on this from twitter: YC invests at $2m valuations, so Paul's take is very logical. This won't apply to startups raising seed rounds at 10x higher valuations. At a 10x valuation, you (literally) need to show your startup is 10x more likely to win. Progress and pitching are part of that, but so are financial plans. Some examples of what financial plans reveal: - are the business model assumptions thoughtful or simplistic (e.g. ramp up team over time vs hire all on day one)? What ARE the key assumptions and levers? - do you have buffer time set aside for a future fundraise? - are you realistic about costs/salaries? Addendum: basically if you're raising a seed round, you should expect that many investors will ask about financial models and projections. This is less about your predicted revenue in month 36, or whatever, and more about understanding how you think about the business for the next year or two.

Scea91 5y ago
> At a 10x valuation, you (literally) need to show your startup is 10x more likely to win. Progress and pitching are part of that, but so are financial plans. Nitpick but this is (literally) not true. Expected value is a function of FUTURE VALUE and PROBABILITY. Unless all the wins are the same future value you can't reduce the reasoning just to probability as you suggest. Practically the valuation is also determined (maybe dominantly) by supply and demand as you are not the only investor in the market.
- lpolovets 5y ago
  You're right, I should've said EV has to be 10x higher, not probability of success. That said, in my experience it's much more common to de-risk a business by an order of magnitude than to 10x the market size.
toss1 5y ago
Cool. Counterpoint from the opposite side of the table. I agree that modeling these factors, checking your assumptions, finding what factors your plan is most sensitive/responsive to, estimating realistic buffers, etc. is extremely useful, and even essential. And doing so at an early stage is very good. However, as Eisenhower said: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Having been expected to write and present such plans /pitch decks as a key element of, or prerequisite to, the first fundraising meeting, I found it absurd. It was obvious to me as I built the models and wrote the deck that it was pure fiction. It was merely a projection of the intersection of our vision, plan, and execution, and the economy, in the next X years. We were basically being asked to produce a linear projection when the entire point is to generate non-linear results and returns. And whatever we produce is hugely sensitive to assumptions in the models. How can selecting a single point out of that fiction even begin to be actually useful as a predictor, at least for anything but linear growth businesses? PaulG highlighted this in his post just a few comments down [0]. So, I'd think it would instead be a great exercise to do with a candidate after the first few meetings, have them generate best-medium-worst case scenarios, and highlight the most sensitive factors - then discuss that, but not as an initial selection criteria. What am I missing here? [0] http://paulgraham.com/ace.html http://paulgraham.com/ace.html
- lpolovets 5y ago
  Re: Eisenhower quote -- this is what I meant in the original comment too. It's less about the details of the plan and more about understanding how someone is thinking about the plan. > I'd think it would instead be a great exercise to do with a candidate after the first few meetings We're on the same page here, too. If we ask for a financial plan it's usually after a meeting or two, not as a filter for whether to take a first meeting.
  - toss1 5y ago
    cool, thanks for the reply

Scea91 5y ago

> At a 10x valuation, you (literally) need to show your startup is 10x more likely to win. Progress and pitching are part of that, but so are financial plans. Nitpick but this is (literally) not true. Expected value is a function of FUTURE VALUE and PROBABILITY. Unless all the wins are the same future value you can't reduce the reasoning just to probability as you suggest. Practically the valuation is also determined (maybe dominantly) by supply and demand as you are not the only investor in the market.

lpolovets 5y ago
You're right, I should've said EV has to be 10x higher, not probability of success. That said, in my experience it's much more common to de-risk a business by an order of magnitude than to 10x the market size.

toss1 5y ago

Cool. Counterpoint from the opposite side of the table. I agree that modeling these factors, checking your assumptions, finding what factors your plan is most sensitive/responsive to, estimating realistic buffers, etc. is extremely useful, and even essential. And doing so at an early stage is very good. However, as Eisenhower said: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Having been expected to write and present such plans /pitch decks as a key element of, or prerequisite to, the first fundraising meeting, I found it absurd. It was obvious to me as I built the models and wrote the deck that it was pure fiction. It was merely a projection of the intersection of our vision, plan, and execution, and the economy, in the next X years. We were basically being asked to produce a linear projection when the entire point is to generate non-linear results and returns. And whatever we produce is hugely sensitive to assumptions in the models. How can selecting a single point out of that fiction even begin to be actually useful as a predictor, at least for anything but linear growth businesses? PaulG highlighted this in his post just a few comments down [0]. So, I'd think it would instead be a great exercise to do with a candidate after the first few meetings, have them generate best-medium-worst case scenarios, and highlight the most sensitive factors - then discuss that, but not as an initial selection criteria. What am I missing here? [0] http://paulgraham.com/ace.html http://paulgraham.com/ace.html

lpolovets 5y ago
Re: Eisenhower quote -- this is what I meant in the original comment too. It's less about the details of the plan and more about understanding how someone is thinking about the plan. > I'd think it would instead be a great exercise to do with a candidate after the first few meetings We're on the same page here, too. If we ask for a financial plan it's usually after a meeting or two, not as a filter for whether to take a first meeting.
- toss1 5y ago
  cool, thanks for the reply