3 ms·

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 win

by 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.

by sskates 14y ago

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.