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What's missing in this article is the impact of liquidation preference on valuation. The billion dollar valuation that a VC invests at is simply the price they
by therealarmen 14y ago
What's missing in this article is the impact of liquidation preference on valuation. The billion dollar valuation that a VC invests at is simply the price they have to pay to get in the deal. For fast-growing startups competition is fierce, so valuations often become dizzyingly large.
The best case scenario is that the startup turns out to be the next Google and everybody gets rich. The worst case (and more common) scenario is that reality hits and the startup sells for $500M instead of $10B. As long as the invested capital is less than $500M, the VC will be getting all of their money back.
- pg 14y agoThe valuations at which VCs invest are not unconstrained though. The valuations at which they invest have to be on average a lower bound on eventual exit valuations, or they'll at best break even, and a VC firm that does no better than break even in one fund will have a hard time raising its next one. E.g. if a VC fund invested in 10 companies at a valuation of a billion each, and 9 tanked while one ended up being worth 20 billion, they'd fairly happy. But all 10 can't tank. It has to work out on average.