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It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. In

by wellboy 13y ago

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val. And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the difference between a 25x and a 100x.

mathattack 13y ago
I think they're making a rational call that they can't weed out which ones will make it. So in your example, they would need to invest in more than twice as many at the lower valuation to get the same # of successes. Just being the devil's advocate. (Not that I intend to compare VCs to devils!)
ronaldx 13y ago
As long as a start up with decent traction has 4x more chance of success (ignoring for now the extra time required for due diligence), which seems likely, a rational investor would typically go for the 25x option.
patrickk 13y ago
Nice explanation. It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.
- wellboy 13y ago
  Thanks and good point and I think that's where new Angels or other investors without any track record or network can get the good deals. By finding founders whose startups are just about to take off, even better with the founders not knowing it yet. :)
- beat 13y ago
  Which leads to a problem pg has pointed out elsewhere... VCs dragging their feet on potential investments, waiting for more data. This steals bandwidth from the founders that could be used to build the company.
ScottBurson 13y ago
Ah, but in order to get that 100x they have to also invest in a larger number of startups, because of all the ones that look promising, they don't know which ones will actually succeed. So their expected return is actually increased -- probably quite substantially -- by requiring traction. Not insane at all.

by wellboy 13y ago

mathattack 13y ago

I think they're making a rational call that they can't weed out which ones will make it. So in your example, they would need to invest in more than twice as many at the lower valuation to get the same # of successes. Just being the devil's advocate. (Not that I intend to compare VCs to devils!)

ronaldx 13y ago

As long as a start up with decent traction has 4x more chance of success (ignoring for now the extra time required for due diligence), which seems likely, a rational investor would typically go for the 25x option.

patrickk 13y ago

Nice explanation. It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.

wellboy 13y ago
Thanks and good point and I think that's where new Angels or other investors without any track record or network can get the good deals. By finding founders whose startups are just about to take off, even better with the founders not knowing it yet. :)
beat 13y ago
Which leads to a problem pg has pointed out elsewhere... VCs dragging their feet on potential investments, waiting for more data. This steals bandwidth from the founders that could be used to build the company.

ScottBurson 13y ago

Ah, but in order to get that 100x they have to also invest in a larger number of startups, because of all the ones that look promising, they don't know which ones will actually succeed. So their expected return is actually increased -- probably quite substantially -- by requiring traction. Not insane at all.