4 ms·

I'm now curious if there are a segment of investors who use valuation to drive their decisions, even if its irrational to do so (valuation in Chris' case was a

by sskates 14y ago

I'm now curious if there are a segment of investors who use valuation to drive their decisions, even if its irrational to do so (valuation in Chris' case was a 2x factor, whereas success vs non success is a 100x one). If they exist, it may be worth targeting them.

aneth4 14y ago
2x on the note is the difference between 50x and 100x. Often such companies are 3x overvalued, and 33x vs 100x massively changes the risk/reward ratios. Capital is always limited, and even in the 2x case, that means one can invest in twice as many companies with twice the potential upside. Suggesting pricing is not a rational factor in investment decisions is exactly the sort of irrational statement that indicates the peek of a bubble. Furthermore, if you pay double, that means you've already lost 50% of your money. Valuation is essentially potential upside discounted by risk. If risk is not factored in properly, investors lose money and nobody wins. Investors expect most of their bets to lose, and winning bets to provide a significant return. That return may average out to around 20% annually for a very good investor. If that investor is paying double, that goes down to 10%, hardly worth the risk of angel investment.
- sskates 14y ago
  Log base 2 of 100 is 6.6. That means you need 6.6 effects the size of valuation in Chris' case in order to have the same impact on your outcome as picking a winner. Can you explain why using valuation to drive your decision is preferable to using the startup's likelihood of being a winner?
  - aneth4 14y ago
    I'm not sure why you are using logarithms. A) 50K at 5M valuation is 1% B) 100K at 10M valuation is 1% If the company sells for $1B, the first investor gets 200X, the first investor gets 100X. The first investor can also invest 50K in another promising startup, increasing the likelihood of them making money with their 100K capital. Given that any individual company has a low chance of a $1B exit (if it had a high one, the valuation would and should be much higher,) diversification is important to investors. Alternatively assuming a fixed investment amount: A) 50K at 5M valuation is 1% B) 50K at 10M valuation is 0.5% If the company sells for $1B, the first investor gets 200X, the first investor gets 100X, and made a drastically different amount of money - $10M vs $5M (less investment). If the investor has a large number of investments, a 200X vs 100X can significantly change the overall outcome of the portfolio. This is less so when we are dealing with these ridiculously high numbers (very few startups exit with this kind of return), but with more typical $20-100M exits, the valuations of the investments makes even more difference. The key point here is that the startup's likelihood of being a winner is a key component of the valuation. If a startup had a very high chance of exiting for $1B, then a $100M valuation may be perfectly reasonable. YC startups, on average, do not have a high chance of a $1B exit. When a startup raises at $15M instead of a more reasonable $5M, it is riskier to invest because the upside, and therefore the expected value, is much smaller. The idea of getting a piece of something no matter how small at any price is just bad investing and bubble mania. This sort of unsustainable logic is what leads to boom busts cycles. It's important for everyone involved to maintain rational pricing in a market, because volatility breeds fear is ultimately damaging to the startup ecosystem.
    - aneth4 14y ago
      When I say "YC startups, on average, do not have a high chance of a $1B exit," I think they do have a significantly higher chance than non-YC startups. However the chance is still low. Even at 1/100, a single $1B exit only breaks an investor even by expected value at a $10M valuation, but is quite profitable at a $5M valuation. Of course, investing is more than probability, but probability is a significant factor.
    - sskates 14y ago
      It's more important to focus on whether a company will be successful than its valuation. Nowhere did I say valuation did not have an impact. Focusing on valuation and ignoring whether a company will be successful is a mistake. I, and any other investor, would have gladly bought Google stock at any valuation before its IPO, whether at $5MM, $15MM or $100MM. Whereas it doesn't matter how great your terms are if the startup you invest in fails.
      - aneth4 14y ago
        What kind of investor focuses on valuation and ignores whether a company will be successful? You said "there are a segment of investors who use valuation to drive their decisions, even if its irrational to do so". It is not irrational to use valuation to drive decisions, though it is obviously stupid to have that be the only factor. It is however, a major one. Of course if success is highly probably, one should not be deterred by valuation, and in fact valuation should be higher. These days, many companies are not risk discounted enough, making many investments a bad deal for investors. Companies raise at $10M valuations and go out of business 6 months later. This is not healthy.
gregpilling 14y ago
There are segments of investors that are investing other people's money OPM and have responsibilities to the other people. There are investors that are investing their own money and do not have to be fiscally responsible for OPM. In simpler words, if I invest in a company I like with my own money then I don't have to explain it to anyone. If I invest the money of wealthy people then I may need to explain my choices to people with lawyers. This can be a difference between Angels and VC. Take my comment with a grain of salt, since I have always been self-funded.
rdl 14y ago
I talked to two investors total who cared about valuation. One is a smaller angel, but a pretty good guy. We stopped before getting to the actual terms (since we decided not to do a big raise at the time, but rather to do low burn and launch first), but he has a reputation for being cheap about valuation to the extent that it kept him out of some deals. The second was IMO the best investor I've talked to to date. his super angel fund wasn't valuation sensitive except that they had a thing against uncapped notes, having done precisely one before and gotten fucked on it. We were trying to defer any talk of valuation by using terms copied from the START note. I kind of regret not just naming a number right then (really, anything in a 2x range would have been adequate), since this investor essentially no longer exists.

by sskates 14y ago

aneth4 14y ago

2x on the note is the difference between 50x and 100x. Often such companies are 3x overvalued, and 33x vs 100x massively changes the risk/reward ratios. Capital is always limited, and even in the 2x case, that means one can invest in twice as many companies with twice the potential upside. Suggesting pricing is not a rational factor in investment decisions is exactly the sort of irrational statement that indicates the peek of a bubble. Furthermore, if you pay double, that means you've already lost 50% of your money. Valuation is essentially potential upside discounted by risk. If risk is not factored in properly, investors lose money and nobody wins. Investors expect most of their bets to lose, and winning bets to provide a significant return. That return may average out to around 20% annually for a very good investor. If that investor is paying double, that goes down to 10%, hardly worth the risk of angel investment.

sskates 14y ago
Log base 2 of 100 is 6.6. That means you need 6.6 effects the size of valuation in Chris' case in order to have the same impact on your outcome as picking a winner. Can you explain why using valuation to drive your decision is preferable to using the startup's likelihood of being a winner?
- aneth4 14y ago
  I'm not sure why you are using logarithms. A) 50K at 5M valuation is 1% B) 100K at 10M valuation is 1% If the company sells for $1B, the first investor gets 200X, the first investor gets 100X. The first investor can also invest 50K in another promising startup, increasing the likelihood of them making money with their 100K capital. Given that any individual company has a low chance of a $1B exit (if it had a high one, the valuation would and should be much higher,) diversification is important to investors. Alternatively assuming a fixed investment amount: A) 50K at 5M valuation is 1% B) 50K at 10M valuation is 0.5% If the company sells for $1B, the first investor gets 200X, the first investor gets 100X, and made a drastically different amount of money - $10M vs $5M (less investment). If the investor has a large number of investments, a 200X vs 100X can significantly change the overall outcome of the portfolio. This is less so when we are dealing with these ridiculously high numbers (very few startups exit with this kind of return), but with more typical $20-100M exits, the valuations of the investments makes even more difference. The key point here is that the startup's likelihood of being a winner is a key component of the valuation. If a startup had a very high chance of exiting for $1B, then a $100M valuation may be perfectly reasonable. YC startups, on average, do not have a high chance of a $1B exit. When a startup raises at $15M instead of a more reasonable $5M, it is riskier to invest because the upside, and therefore the expected value, is much smaller. The idea of getting a piece of something no matter how small at any price is just bad investing and bubble mania. This sort of unsustainable logic is what leads to boom busts cycles. It's important for everyone involved to maintain rational pricing in a market, because volatility breeds fear is ultimately damaging to the startup ecosystem.
  - aneth4 14y ago
    When I say "YC startups, on average, do not have a high chance of a $1B exit," I think they do have a significantly higher chance than non-YC startups. However the chance is still low. Even at 1/100, a single $1B exit only breaks an investor even by expected value at a $10M valuation, but is quite profitable at a $5M valuation. Of course, investing is more than probability, but probability is a significant factor.
  - sskates 14y ago
    It's more important to focus on whether a company will be successful than its valuation. Nowhere did I say valuation did not have an impact. Focusing on valuation and ignoring whether a company will be successful is a mistake. I, and any other investor, would have gladly bought Google stock at any valuation before its IPO, whether at $5MM, $15MM or $100MM. Whereas it doesn't matter how great your terms are if the startup you invest in fails.
    - aneth4 14y ago
      What kind of investor focuses on valuation and ignores whether a company will be successful? You said "there are a segment of investors who use valuation to drive their decisions, even if its irrational to do so". It is not irrational to use valuation to drive decisions, though it is obviously stupid to have that be the only factor. It is however, a major one. Of course if success is highly probably, one should not be deterred by valuation, and in fact valuation should be higher. These days, many companies are not risk discounted enough, making many investments a bad deal for investors. Companies raise at $10M valuations and go out of business 6 months later. This is not healthy.

gregpilling 14y ago

There are segments of investors that are investing other people's money OPM and have responsibilities to the other people. There are investors that are investing their own money and do not have to be fiscally responsible for OPM. In simpler words, if I invest in a company I like with my own money then I don't have to explain it to anyone. If I invest the money of wealthy people then I may need to explain my choices to people with lawyers. This can be a difference between Angels and VC. Take my comment with a grain of salt, since I have always been self-funded.

rdl 14y ago

I talked to two investors total who cared about valuation. One is a smaller angel, but a pretty good guy. We stopped before getting to the actual terms (since we decided not to do a big raise at the time, but rather to do low burn and launch first), but he has a reputation for being cheap about valuation to the extent that it kept him out of some deals. The second was IMO the best investor I've talked to to date. his super angel fund wasn't valuation sensitive except that they had a thing against uncapped notes, having done precisely one before and gotten fucked on it. We were trying to defer any talk of valuation by using terms copied from the START note. I kind of regret not just naming a number right then (really, anything in a 2x range would have been adequate), since this investor essentially no longer exists.