8 ms·

Valuations

186 points by moritzplassnig 12y ago

hglaser 12y ago
"It turns out to be really good for a company to have a board -- it focuses the company if everyone knows they have to present the key metrics to outsiders once a month. ... If I could ask VCs for only one thing in this new world, it’d be to keep showing up for board meetings." This is very interesting. If ownership percentages at Series A are trending down, and investor time & emotional investment per company is trending down as a result, but having outside accountability predicts success, then I wonder how the best companies will replicate outside accountability. Put another way: How could you hack a replacement for a board meeting? I'm a funded entrepreneur without a board. I've tried nominating advisors and/or very-helpful angels as our "pseudo-board" and meeting monthly. This didn't help very much: There's something about having a lot of skin in the game that makes board members really prepare, take it seriously, and summon courage to have hard conversations with CEOs when things aren't working. The one thing that worked pretty well was bolting a whiteboard over the desk area with this month's single goal (a revenue number, natch) and value so far. I don't have any board experience to compare it to, but it certainly keeps us focused. Anyone else have ideas that have worked, or might work?
- deleted 12y ago
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- sparkzilla 12y ago
  Who needs a board when you've got a whiteboard!
- claudiusd 12y ago
  Your board (and VCs by extension) are not the only accountable 3rd-parties... I'd argue that they're not even the best accountable 3rd-parties because they're interests are not necessarily aligned with yours - VCs have limited partners to worry about. Look no further than your customers for great 3rd-party accountability. If they love and use your product, they will pay you more money and recommend you to others. They should be the only thing that matters. In fact, by not having a board you have the luxury of only being accountable to them.
- steveplace 12y ago
  >How could you hack a replacement for a board meeting? Mastermind groups.
  - Alupis 12y ago
    The valuation bubble will eventually burst -- the question is when? The gross over-valuations occuring today are not sustainable -- the companies that are being purchased for billions USD are not actually worth that much. $16 Billion for an instant messaging company, $2 Billion for a research company with no product. Now everyone feels they are worth Billions when in fact, not only 3 years ago these companies would have sold for maybe a few hundred million USD at best.
    - rqebmm 12y ago
      I see them as merely a correlation of the overvaluation of tech companies, not a continuation of the bubble cycle. Most of those huge acquisitions are done with stock, and if that stock is overvalued, so is the purchase price, even if the purchase price was correctly valued once you control for the price of the stock. Take WhatsApp's acquisition which is the holy grail of overvaluation. If you think Facebook's stock is way overvalued, then Facebook may have correctly valued WhatsApp's price. If you remember it was initially announced as 19b before Facebook's stock devalued it to 16b in the face of the seemingly hilarious overpay.
- yesimahuman 12y ago
  We just did a late-seed round from a VC firm and didn't set up a board. Something that has worked for us is doing a bi-weekly Google Hangout that has no agenda. The rule is no one prepares for it, but we just talk about stuff at a high level. So far it's been really helpful. We don't feel unnecessary pressure to prepare decks with stats and metrics on things that aren't important or will be changing quickly (plus I have the key ones memorized anyways), yet we communicate frequently enough that issues can be tracked closely and fixed. It also works that we had only one firm in the round so coordinating it is easy. Might not work if you have lots of angels or other investors.
  - mncolinlee 12y ago
    While it's an interesting approach that helps the founders by providing advice, no metrics doesn't do much for accountability. How do you ensure someone points out the digital elephant hiding in the Google Hangout room?
    - yesimahuman 12y ago
      Of course we talk metrics, we just don't prepare them formally. And we don't have to because our dashboards are pretty much real time anyways (which we sometimes jump into through screen share).
- 001sky 12y ago
  The fundamental questions seems to be (1)"what is the purpose of a BOD"; and (2) are the "good things" the primary purpose of the BOD or the emergent phenomena that happen as a result of (#1). In other words, will (#2) type events happen outside the context of (#1). And this includes changing (#2) type things to be (#1) at a formal level.
- opendais 12y ago
  Wouldn't Buffer-like transparency be just as effective, honestly? The thing implied seems to be "The process to generate the presentation to the board == Value due to focus on key metrics." If you know what your key metrics are, if you have to provide them to outsiders once a month, does it matter if the outsiders provide feedback or not? It seems not as long as the only goal is focus on the key metrics. Only flaw would be if you picked the wrong metrics, but if you picked the wrong metrics...would you really have succeeded anyway?
  - namenotrequired 12y ago
    My guess is that the knowledge that you will get feedback is significant, because the worry about what the feedback will be like forces you to focus better. That said, public transparency probably has the same effect.
    - opendais 12y ago
      If it is buffer like transparency, the VC can still read through and provide feedback at their leisure. No commute or anything. ;) At least to me, lowering the effort results in more/better participation.
- lifeisstillgood 12y ago
  My father-in-law works really well as someone I am scared to report key metrics to. We can always find someone we respect and fear (just a little) and yet has enough business background to make intelligent judgements. It is really up to us if we want to have the judgement, and put ourselves in thrall to that judgement.
jacoblyles 12y ago
I recently took a trip to Asia where capital is hard to come by and startup valuations are much lower. It seems that if VCs are having trouble finding return, they might be well served by investing in global expertise. Are the consumer markets so much better in America that it's worth paying 4x valuation and competing with lots of other VCs for deals? The answer may be "yes", but it doesn't seem obvious to me.
- stock_toaster 12y ago
  > Are the consumer markets so much better in America that > it's worth paying 4x valuation and competing with lots of > other VCs for deals? The answer may be "yes", but it > doesn't seem obvious to me Don't forget that there are known quantities of legal/tax vehicles for VC investment in certain countries. If those things are not present, I imagine it would increase the risk for the VC, and impact valuation and capital availability.
  - barry-cotter 12y ago
    Don't forget political risk. Rundown of Asian countries with political risk comparable to the US; Japan, Lorraine, Taiwan, Singapore. Countries with more political risk but not much; India, Indonesia, Malaysia, Thailand. The second group have much worse legal/regulatory systems for doing business. I wouldn't plan on getting incredibly rich in any other Asian country unless I had a friend/patron to protect me from expropriation/gangsters. And you better be able to provide your friend with some quid quo pro orbe related tl them either by blood or by kid. I may be overly cynical here but that's the perspective from China.
- seanmcdirmid 12y ago
  The consumer markets and VC climates in other markets can be much worse. Take china for example...the VCs are only interested in funding shanzhai rip-off copies of ideas of ideas already proven in western markers.
sudonim 12y ago
We decided not to pursue subsequent rounds of funding beyond a seed. I'm also hearing about deals with quite cheap capital (high valuations, favorable terms) flowing to companies near us. For SaaS it seems you can get deals with valuations at 10x revenue and YC Companies in SaaS are getting a premium even on that. Cheap money can help you weather a storm and smooth over mistakes, but it also increases your risks as a business and reduces the "successful" outcomes you can have. At the end of the day if your goal is to build a sustainable business, cheap money can't guarantee that.
- suhail 12y ago
  I'd say it's more like 20x revenue actually (assuming the stage is series A/B)
mrtron 12y ago
Missing word We’re more and more A rounds happen with less than 20% ownership going to the investors, and fewer and fewer requirements about investor control over the company. -> We're seeing more and more
acabrahams 12y ago
A coincidence that sama has published this the same week that a single-feature app like Yo! announced that it raised $1m...?
- raverbashing 12y ago
  Well, the Yo case is really eye-opening. It seems 1Mi dollars is pocket change to some people. 1Mi dollars is a lot of money in the real world.
  - sillysaurus3 12y ago
    $1M isn't much for VCs. Yo didn't raise money from VCs, however. They raised it from angels, and it's a lot of money to them. Why is it hard to believe that $1M isn't really a lot of money in the context of business?
beat 12y ago
What will this all means in terms of "smart" angel money versus "dumb" angel money? If angel investing is becoming more a matter of prestige than thrill/returns, it could become much easier to get an angel round, but at the price of dumb investors who lack the patience or stomach to deal with the ups and downs of startups. I know I'm going to have to look for angel money in the next year. And when I find my angels, I want them to be the first people I turn to when things are hard. I want them to be genuinely helpful and supportive, not angrily demanding to get their money back at every little hiccup.
budu3 12y ago
> And a macroeconomic collapse—which may happen—would certainly correct valuations in a hurry I wonder what the collapse will look like and what will cause it.
- nostrademons 12y ago
  Probably not all that different from the last one. Economy starts heating up, and the Fed begins to tighten interest rates to damp down inflation. It takes time for interest rate hikes to make their way through the economy, so they keep tightening. Eventually, everybody realizes that money isn't cheap anymore, and moreover, they realize that everybody else has realized that money isn't cheap anymore. That causes a mass stampede for the exits as people fly away from risk. In the last crash, the economy started heating up in 2004, the Fed started tightening in 2005 and continued through 2006, the market hit a top in August of 2007, there was a slow-motion recession through late 2007 and early 2008, and then everybody ran for the exits in the summer of 2008. This time, I think the economy started heating up in 2013, the Fed is planning to tighten starting early 2015, it'll take about 18 months for the rate hikes to make their way through the economy, and so I'd expect a crash around 2017.
  - deleted 12y ago
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  - interpares 12y ago
    It's starting to feel like we're permanently addicted to low interest rates.
    - crpatino 12y ago
      Indeed.
  - a8da6b0c91d 12y ago
    These two charts tell the story: http://www.oftwominds.com/photos2014/total-credit6-14.png http://www.oftwominds.com/photos2014/total-credit6-14.png http://www.oftwominds.com/photos2014/usfed-balance-sheet6-14.png http://www.oftwominds.com/photos2014/usfed-balance-sheet6-14... Read the whole thing: http://www.oftwominds.com/blogjune14/central-planning6-14.html http://www.oftwominds.com/blogjune14/central-planning6-14.ht... We are in a debt bubble propped up by massive central bank intervention all over the world. The intervention will fail at some point and well get a bout of deflation just like in 2008, only this time more severe.
RKoutnik 12y ago
It's interesting to see a post discussing how free VCs are in their investments as I'm sending out job applications because we couldn't make it past the Series A crunch despite big-name customers and ex-FB/Googlers on the founding team. Make no mistake, VC firms may be increasing the capital they're investing in the markets but by no means does that translate into "everyone gets a free ride".
meritt 12y ago
Is there a decent way to calculate valuation? We're starting to be approached with merger/acquisition talk and we're unsure on how to best determine our value in that scenario. We're a 2.5 yr old company, annual revenue for this year forecasting to $1.1M. (2013 was $360k, 2012 was $60k). We're a team of 5 salaried employees (founders included), bootstrapped, fully employee-owned and steady revenue growth with very low operational costs.
- rahimnathwani 12y ago
  Comps and competition. Three lines of enquiry to get started: 1. Compare between buyers (i.e. engage with multiple buyers so you can hopefully choose between competing offers) 2. Comparables 2a. look for recent sales of companies with similar size/trajectory) 2b. look at exit valuation ratios for companies in a similar industry ($ per engineer, price/earnings ration, $ per $revenue) 3. DCF (this is the first method of valuation taught to MBAs, but may not be much useful if your future cash flows are highly uncertain)
- deleted 12y ago
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- Lost_BiomedE 12y ago
  Comparables are good, but you may also want to check out Aswath Damodaran's work. The simplistic version is to do a discounted cash flow analysis and use comparables to get an idea on the discount and other variables.
- mbesto 12y ago
  It depends. Generally speaking valuation is speculative. Think of it this way - a gallon of milk is priced at $3 because that's the price people are willing to pay for it. If it was $10, no one would buy it and if it was $0.01, they'd run out of supply. Same thing goes for business. The valuation is whatever people are willing to pay for it. If I buy milk for $3 it's because I know if I consume foods right now it will give me energy so I can do more things later in the day. Some people create a story speculating that a particular gallon of milk has the ability to give you twice the energy, so they'd price it at $6. These stories turn out to be true sometimes and sometimes not. Hence, why today valuations are considered crazy because everyone is painting a unicorn story. A few factors go into valuing a company, which potentially aid the craze: 1. There is extremely low liquidity in non-public markets for investing. In other words, you don't have a millions of people in the US investing in startups every day. In a perfectly elastic market, valuations are 100% correct. Due to the high liquidity and number of actors, public markets are much better at reaching perfect elasticity whereas private markets are not. In other words, less actors dictating how much they are willing to pay for something means higher deviations from the true price. 2. Many tech companies are irregularly (irregular in relation to existing companies) evaluated today because they do not follow traditional investment metrics. This is largely set by precedence. When Facebook and Google IPO'd, the investing community was fairly clueless as to how to evaluate these companies. The metric they've chose is DAU/MAU because it translates into how much attention "land" they can acquire to resell to advertisers and hence increase revenues and profits. Now that these are "the metrics" it means every other "tech startup" is in a land grab to attain those numbers quicker anf faster than before. This is why Instagram and WhatsApp had such high valuations...their DAU/MAU's were crazy high and growing at faster rates than Facebook itself. Generally, the larger investing community values companies based on earnings. EBITDA is usually a popular metric to do this, but one metric can't dictate everything about the valuation. Valuations are based on a series of metrics, a multiplier, all based on the speculative return of buying the business. So for example, a company a one-year $1.1m budgeted forecast might be speculate to be worth $5mil simply because the revenue growth trajectory means they can return. Now add in a multiplier of 2.2x because your team is a group of badasses and your contracts last 3 years, and bam your company is worth $11mil. Because tech markets have high growth potential (Uber is quoting to having had doubled their growth every 6 months) it means the valuations are abnormally higher than many other businesses. How many hair salons do you know that are doubling revenue every 6 months and have relative businesses who have shown similarly consistent growth in that market? All things being equal, the question ultimately becomes "what part of the hockey stick am I on?".
johnrob 12y ago
I haven't seen any evidence that suggests starting a company during a boom economy makes it easier to succeed. It does make it easier to get a salary while failing though (which is better than just failing and getting nothing).
bthomas 12y ago
A lot of the "real money" startups generate is from selling services to other startups and tech companies - particularly in the YC ecosystem. It's possible that revenue will slow in a crash and start a nasty cycle.
- timr 12y ago
  That's exactly what happened during the 2000 crash -- much of the "revenue" being booked by internet companies was imaginary (in the form of contract swaps), and much of that was driven by intra-industry advertising. Everyone was paying everyone else to advertise, and it all fell apart more quickly than you'd expect given top-line revenue numbers. I suspect something similar will happen this time around -- there will be a slowdown in the real economy for some unpredictable reason, and the imaginary, startup-servicing-startups economy will implode.
- 7Figures2Commas 12y ago
  This is an important observation. There are absolutely angel and venture-backed startups with "real" revenue (fewer with actual earnings), but if you look closely, it appears that a non-negligible percentage of them derive a not insignificant portion of their revenues from sales to other angel and venture-backed startups. More broadly, an even larger number of startups are also indirectly dependent on the current landscape, as they operate in regional markets where consumption is being driven in large part by the influx of capital into tech. There's nothing wrong with building a business that takes advantage of these types of situations, but my sense is that a lot of the entrepreneurs running these types of companies aren't consciously aware that they're the beneficiaries of an environment that will eventually change. As such, they're not at all focused on trying to diversify their revenue base and to be frank, it many cases there really isn't an opportunity for them to do so anyway.
- tomasien 12y ago
  To YC's credit, it's incredibly hard to sell anything to the YC ecosystem from outside of it, because they already have chosen options from inside of it. Yet another reason to give radical differentiation a shot if you can stomach it.
deleted 12y ago
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- nostrademons 12y ago
  He's saying that the supply of investment dollars is going up faster than the supply of startups.
  - Permit 12y ago
    Yup, I completely misread that. Thanks.
raldi 12y ago
This kinda looks like a vicious / virtuous cycle: * Interest rates are kept low primarily because of the unemployment crisis. (Right?) * But then that encourages capital-holders to invest in, among other things, tech and startups. * And then those companies invent things that make more jobs obsolete, causing unemployment to remain high. Are my assumptions correct? What breaks the cycle? Or will it spiral out of control until we decide it's time to stop worrying about unemployment and just start paying everyone a basic income?
- Domenic_S 12y ago
  > stop worrying about unemployment and just start paying everyone a basic income? What I've never understood about BI is how it works for the middle class. Consider: a cohabiting couple each work entry-level tech jobs and bring in a combined $100k. They buy a condo together, maybe a couple of halfway decent cars. They're being responsible. Then, economy tanks/tech bubble bursts/etc and they have to live off their BI which if I understand correctly should fall somewhere in the $15k/year range each, so $30k total. How do they pay their bills? In other words, what good is $15k/year when you've been living on $15k/month? Or $7k or $5k/month? It's better than a poke in the butt with a sharp stick, but it's just delaying the inevitable, isn't it? If then BI is instead mainly for the low-income portion of society, well, we already have that -- it's called welfare/social security/disability. I'm missing something.
  - stonemetal 12y ago
    > but it's just delaying the inevitable What do you see as the inevitable? It wouldn't prevent them from losing something, but it would be the difference between the bottom being living under a bridge completely destitute and living in a shabby apartment until they got back on their feet.
  - nostrademons 12y ago
    Then they adjust. I think the point of BI is to keep you from starving. The idea is that no matter who you are or what your station is in society, you should be able to afford food, a roof over your head, and basic medical care. It's not to maintain your social standing in life - someone who has a job will rightfully have a higher standard of living than someone who doesn't. And you shouldn't expect it to be a comfortable middle class existence, you should expect it to involve living like the working poor today - a cramped apartment, not much in luxuries, public transportation or long commutes. But it takes the stress out of simply existing. The idea is that it's set at a level where you're not going to die, you're not going to end up homeless, you're just not going to be very comfortable. As for how it's different from welfare/social security/disability - I usually see it pitched as a way of unifying all of those (and the EITC), so that people don't fall through the cracks because they don't know how to sign up or what they're entitled to. It'd save on administration costs as well.
jwheeler79 12y ago
sam, go take some time and read about the shoebutton complex
webwright 12y ago
"Resist the urge to raise and spend too much money. The track record of companies that raise $30MM or more in their first round is bad." Q: Is the track record bad, or do they just fail louder than the ocean of companies that raise small amounts of $ and then quietly die? It'd be interesting if someone could prove that a large raise actually hurts your chances, but for a disciplined/veteran founder (who would raise a lot but spend it thoughtfully rather than recklessly), it seems like it shouldn't. Edit: http://www.alleywatch.com/2014/02/the-10-biggest-series-a-rounds-of-all-time/ http://www.alleywatch.com/2014/02/the-10-biggest-series-a-ro... - "All of the companies are still operational in some capacity."
- rqebmm 12y ago
  It may also be related to the fact that the get-big-quick scheme is inherently risky in order to return the necessary rewards. If you're raising a ton of money you have to be a home run, and that means you may pass on moderately profitable opportunities in order to keep looking for insanely profitable ones.
  - webwright 12y ago
    If you're raising ANY institutional money, the expectation is trying for a home run (though most expect the process to take 7+ years).
    - rqebmm 12y ago
      sure, but if you haven't taken a ton of money, you have the opportunity at some point to take a strategy that turns a small, steady profit now instead of being continually forced to doubling down on being the Next Big Thing
      - prostoalex 12y ago
        Good luck aligning those goals with investors'. Most of them signed up for the Next Big Thing, if they wanted a small steady profit, they would've bought a condo and rented it out.
Apple2047 12y ago
Huawei. Psix U06 308 00757
Apple2047 12y ago
308 00757 Huawei. Psix U06
Im_Talking 12y ago
I don't know what this article was trying to convey. Valuations are a subjective airy-fairy number and, in reality, based on the strategic need of a buying entity. For example, when I was in the process of selling my last business I had 3 offers. 2 offers were from companies that wanted me obviously but didn't need me strategically, therefore their valuations were low. The 3rd offer was from a company who had a hole in their product-line and my tools fit perfectly in that hole, hence their perception of my company's value was much higher. So find businesses which have a strategic need (or convince them of such need). Also, I would assume but have no evidence that strategic acquisitions have a higher success ratio than purely financial acquisitions. And just like salespeople should 'always be closing', business owners should 'always be exiting'.
- namenotrequired 12y ago
  > And just like salespeople should 'always be closing', business owners should 'always be exiting'. That's interesting, could you expand on that a bit? Do you mean you should always have a few good exit scenarios prepared (e.g. keep a few potential acquirers interested) in case you need one?
  - Im_Talking 12y ago
    Sure. A business should always be prepared for outside interest meaning that you should have up-to-date financials that you can give-out anytime which show the summary information and overall financial trend, have no unusual liabilities like a unpaid tax liability, systems in-place to automate business functions (so a potential acquirer can see an efficient organisation), all employees/customers on some kind-of contract, no IP issues (all B2B relationships under contract). So any business with interest can spend a minimal time in due-diligence and see an efficient, professional organisation with no skeletons. At the same time, the goal of business is to exit, either via a buyout, or IPO, or whatever. No one wants to own a business that is unattractive for acquisition or investment, since these businesses just fade-away over time. So the directors need to continually look for potential strategic relationships; a) because these are obviously potential customers, and b) because they are potential acquirers who will pay top-dollar for your business. This means that they will forget any standard valuation formulas ('X' x sales, 'Y' x EBITDA, whatever) and look at their overall strategic need for what your business will bring to them. And, most importantly, you need to communicate with them on this strategic level... so you need to do your research and keep your ears open to understand their pain points, and strategic needs. By keeping your house in order, looking at the strategic level, and trying to elicit the interest of those businesses who 'need' you, you may get yourself in the perfect situations where you have competing bids, or the interested parties start to think (with your gentle prodding, of course) of the pain if you were bought-out by their competitor, etc. These are the ideal situations. But they don't happen by themselves, hence my line: always be exiting.

186 points by moritzplassnig 12y ago

"It turns out to be really good for a company to have a board -- it focuses the company if everyone knows they have to present the key metrics to outsiders once a month. ... If I could ask VCs for only one thing in this new world, it’d be to keep showing up for board meetings." This is very interesting. If ownership percentages at Series A are trending down, and investor time & emotional investment per company is trending down as a result, but having outside accountability predicts success, then I wonder how the best companies will replicate outside accountability. Put another way: How could you hack a replacement for a board meeting? I'm a funded entrepreneur without a board. I've tried nominating advisors and/or very-helpful angels as our "pseudo-board" and meeting monthly. This didn't help very much: There's something about having a lot of skin in the game that makes board members really prepare, take it seriously, and summon courage to have hard conversations with CEOs when things aren't working. The one thing that worked pretty well was bolting a whiteboard over the desk area with this month's single goal (a revenue number, natch) and value so far. I don't have any board experience to compare it to, but it certainly keeps us focused. Anyone else have ideas that have worked, or might work?

deleted 12y ago
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sparkzilla 12y ago
Who needs a board when you've got a whiteboard!
claudiusd 12y ago
Your board (and VCs by extension) are not the only accountable 3rd-parties... I'd argue that they're not even the best accountable 3rd-parties because they're interests are not necessarily aligned with yours - VCs have limited partners to worry about. Look no further than your customers for great 3rd-party accountability. If they love and use your product, they will pay you more money and recommend you to others. They should be the only thing that matters. In fact, by not having a board you have the luxury of only being accountable to them.
steveplace 12y ago
>How could you hack a replacement for a board meeting? Mastermind groups.
- Alupis 12y ago
  The valuation bubble will eventually burst -- the question is when? The gross over-valuations occuring today are not sustainable -- the companies that are being purchased for billions USD are not actually worth that much. $16 Billion for an instant messaging company, $2 Billion for a research company with no product. Now everyone feels they are worth Billions when in fact, not only 3 years ago these companies would have sold for maybe a few hundred million USD at best.
  - rqebmm 12y ago
    I see them as merely a correlation of the overvaluation of tech companies, not a continuation of the bubble cycle. Most of those huge acquisitions are done with stock, and if that stock is overvalued, so is the purchase price, even if the purchase price was correctly valued once you control for the price of the stock. Take WhatsApp's acquisition which is the holy grail of overvaluation. If you think Facebook's stock is way overvalued, then Facebook may have correctly valued WhatsApp's price. If you remember it was initially announced as 19b before Facebook's stock devalued it to 16b in the face of the seemingly hilarious overpay.
yesimahuman 12y ago
We just did a late-seed round from a VC firm and didn't set up a board. Something that has worked for us is doing a bi-weekly Google Hangout that has no agenda. The rule is no one prepares for it, but we just talk about stuff at a high level. So far it's been really helpful. We don't feel unnecessary pressure to prepare decks with stats and metrics on things that aren't important or will be changing quickly (plus I have the key ones memorized anyways), yet we communicate frequently enough that issues can be tracked closely and fixed. It also works that we had only one firm in the round so coordinating it is easy. Might not work if you have lots of angels or other investors.
- mncolinlee 12y ago
  While it's an interesting approach that helps the founders by providing advice, no metrics doesn't do much for accountability. How do you ensure someone points out the digital elephant hiding in the Google Hangout room?
  - yesimahuman 12y ago
    Of course we talk metrics, we just don't prepare them formally. And we don't have to because our dashboards are pretty much real time anyways (which we sometimes jump into through screen share).
001sky 12y ago
The fundamental questions seems to be (1)"what is the purpose of a BOD"; and (2) are the "good things" the primary purpose of the BOD or the emergent phenomena that happen as a result of (#1). In other words, will (#2) type events happen outside the context of (#1). And this includes changing (#2) type things to be (#1) at a formal level.
opendais 12y ago
Wouldn't Buffer-like transparency be just as effective, honestly? The thing implied seems to be "The process to generate the presentation to the board == Value due to focus on key metrics." If you know what your key metrics are, if you have to provide them to outsiders once a month, does it matter if the outsiders provide feedback or not? It seems not as long as the only goal is focus on the key metrics. Only flaw would be if you picked the wrong metrics, but if you picked the wrong metrics...would you really have succeeded anyway?
- namenotrequired 12y ago
  My guess is that the knowledge that you will get feedback is significant, because the worry about what the feedback will be like forces you to focus better. That said, public transparency probably has the same effect.
  - opendais 12y ago
    If it is buffer like transparency, the VC can still read through and provide feedback at their leisure. No commute or anything. ;) At least to me, lowering the effort results in more/better participation.
lifeisstillgood 12y ago
My father-in-law works really well as someone I am scared to report key metrics to. We can always find someone we respect and fear (just a little) and yet has enough business background to make intelligent judgements. It is really up to us if we want to have the judgement, and put ourselves in thrall to that judgement.

jacoblyles 12y ago

I recently took a trip to Asia where capital is hard to come by and startup valuations are much lower. It seems that if VCs are having trouble finding return, they might be well served by investing in global expertise. Are the consumer markets so much better in America that it's worth paying 4x valuation and competing with lots of other VCs for deals? The answer may be "yes", but it doesn't seem obvious to me.

stock_toaster 12y ago
> Are the consumer markets so much better in America that > it's worth paying 4x valuation and competing with lots of > other VCs for deals? The answer may be "yes", but it > doesn't seem obvious to me Don't forget that there are known quantities of legal/tax vehicles for VC investment in certain countries. If those things are not present, I imagine it would increase the risk for the VC, and impact valuation and capital availability.
- barry-cotter 12y ago
  Don't forget political risk. Rundown of Asian countries with political risk comparable to the US; Japan, Lorraine, Taiwan, Singapore. Countries with more political risk but not much; India, Indonesia, Malaysia, Thailand. The second group have much worse legal/regulatory systems for doing business. I wouldn't plan on getting incredibly rich in any other Asian country unless I had a friend/patron to protect me from expropriation/gangsters. And you better be able to provide your friend with some quid quo pro orbe related tl them either by blood or by kid. I may be overly cynical here but that's the perspective from China.
seanmcdirmid 12y ago
The consumer markets and VC climates in other markets can be much worse. Take china for example...the VCs are only interested in funding shanzhai rip-off copies of ideas of ideas already proven in western markers.

sudonim 12y ago

We decided not to pursue subsequent rounds of funding beyond a seed. I'm also hearing about deals with quite cheap capital (high valuations, favorable terms) flowing to companies near us. For SaaS it seems you can get deals with valuations at 10x revenue and YC Companies in SaaS are getting a premium even on that. Cheap money can help you weather a storm and smooth over mistakes, but it also increases your risks as a business and reduces the "successful" outcomes you can have. At the end of the day if your goal is to build a sustainable business, cheap money can't guarantee that.

suhail 12y ago
I'd say it's more like 20x revenue actually (assuming the stage is series A/B)

mrtron 12y ago

Missing word We’re more and more A rounds happen with less than 20% ownership going to the investors, and fewer and fewer requirements about investor control over the company. -> We're seeing more and more

acabrahams 12y ago

A coincidence that sama has published this the same week that a single-feature app like Yo! announced that it raised $1m...?

raverbashing 12y ago
Well, the Yo case is really eye-opening. It seems 1Mi dollars is pocket change to some people. 1Mi dollars is a lot of money in the real world.
- sillysaurus3 12y ago
  $1M isn't much for VCs. Yo didn't raise money from VCs, however. They raised it from angels, and it's a lot of money to them. Why is it hard to believe that $1M isn't really a lot of money in the context of business?

beat 12y ago

What will this all means in terms of "smart" angel money versus "dumb" angel money? If angel investing is becoming more a matter of prestige than thrill/returns, it could become much easier to get an angel round, but at the price of dumb investors who lack the patience or stomach to deal with the ups and downs of startups. I know I'm going to have to look for angel money in the next year. And when I find my angels, I want them to be the first people I turn to when things are hard. I want them to be genuinely helpful and supportive, not angrily demanding to get their money back at every little hiccup.

budu3 12y ago

> And a macroeconomic collapse—which may happen—would certainly correct valuations in a hurry I wonder what the collapse will look like and what will cause it.

nostrademons 12y ago
Probably not all that different from the last one. Economy starts heating up, and the Fed begins to tighten interest rates to damp down inflation. It takes time for interest rate hikes to make their way through the economy, so they keep tightening. Eventually, everybody realizes that money isn't cheap anymore, and moreover, they realize that everybody else has realized that money isn't cheap anymore. That causes a mass stampede for the exits as people fly away from risk. In the last crash, the economy started heating up in 2004, the Fed started tightening in 2005 and continued through 2006, the market hit a top in August of 2007, there was a slow-motion recession through late 2007 and early 2008, and then everybody ran for the exits in the summer of 2008. This time, I think the economy started heating up in 2013, the Fed is planning to tighten starting early 2015, it'll take about 18 months for the rate hikes to make their way through the economy, and so I'd expect a crash around 2017.
- deleted 12y ago
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- interpares 12y ago
  It's starting to feel like we're permanently addicted to low interest rates.
  - crpatino 12y ago
    Indeed.
- a8da6b0c91d 12y ago
  These two charts tell the story: http://www.oftwominds.com/photos2014/total-credit6-14.png http://www.oftwominds.com/photos2014/total-credit6-14.png http://www.oftwominds.com/photos2014/usfed-balance-sheet6-14.png http://www.oftwominds.com/photos2014/usfed-balance-sheet6-14... Read the whole thing: http://www.oftwominds.com/blogjune14/central-planning6-14.html http://www.oftwominds.com/blogjune14/central-planning6-14.ht... We are in a debt bubble propped up by massive central bank intervention all over the world. The intervention will fail at some point and well get a bout of deflation just like in 2008, only this time more severe.

RKoutnik 12y ago

It's interesting to see a post discussing how free VCs are in their investments as I'm sending out job applications because we couldn't make it past the Series A crunch despite big-name customers and ex-FB/Googlers on the founding team. Make no mistake, VC firms may be increasing the capital they're investing in the markets but by no means does that translate into "everyone gets a free ride".

meritt 12y ago

Is there a decent way to calculate valuation? We're starting to be approached with merger/acquisition talk and we're unsure on how to best determine our value in that scenario. We're a 2.5 yr old company, annual revenue for this year forecasting to $1.1M. (2013 was $360k, 2012 was $60k). We're a team of 5 salaried employees (founders included), bootstrapped, fully employee-owned and steady revenue growth with very low operational costs.

rahimnathwani 12y ago
Comps and competition. Three lines of enquiry to get started: 1. Compare between buyers (i.e. engage with multiple buyers so you can hopefully choose between competing offers) 2. Comparables 2a. look for recent sales of companies with similar size/trajectory) 2b. look at exit valuation ratios for companies in a similar industry ($ per engineer, price/earnings ration, $ per $revenue) 3. DCF (this is the first method of valuation taught to MBAs, but may not be much useful if your future cash flows are highly uncertain)
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Lost_BiomedE 12y ago
Comparables are good, but you may also want to check out Aswath Damodaran's work. The simplistic version is to do a discounted cash flow analysis and use comparables to get an idea on the discount and other variables.
mbesto 12y ago
It depends. Generally speaking valuation is speculative. Think of it this way - a gallon of milk is priced at $3 because that's the price people are willing to pay for it. If it was $10, no one would buy it and if it was $0.01, they'd run out of supply. Same thing goes for business. The valuation is whatever people are willing to pay for it. If I buy milk for $3 it's because I know if I consume foods right now it will give me energy so I can do more things later in the day. Some people create a story speculating that a particular gallon of milk has the ability to give you twice the energy, so they'd price it at $6. These stories turn out to be true sometimes and sometimes not. Hence, why today valuations are considered crazy because everyone is painting a unicorn story. A few factors go into valuing a company, which potentially aid the craze: 1. There is extremely low liquidity in non-public markets for investing. In other words, you don't have a millions of people in the US investing in startups every day. In a perfectly elastic market, valuations are 100% correct. Due to the high liquidity and number of actors, public markets are much better at reaching perfect elasticity whereas private markets are not. In other words, less actors dictating how much they are willing to pay for something means higher deviations from the true price. 2. Many tech companies are irregularly (irregular in relation to existing companies) evaluated today because they do not follow traditional investment metrics. This is largely set by precedence. When Facebook and Google IPO'd, the investing community was fairly clueless as to how to evaluate these companies. The metric they've chose is DAU/MAU because it translates into how much attention "land" they can acquire to resell to advertisers and hence increase revenues and profits. Now that these are "the metrics" it means every other "tech startup" is in a land grab to attain those numbers quicker anf faster than before. This is why Instagram and WhatsApp had such high valuations...their DAU/MAU's were crazy high and growing at faster rates than Facebook itself. Generally, the larger investing community values companies based on earnings. EBITDA is usually a popular metric to do this, but one metric can't dictate everything about the valuation. Valuations are based on a series of metrics, a multiplier, all based on the speculative return of buying the business. So for example, a company a one-year $1.1m budgeted forecast might be speculate to be worth $5mil simply because the revenue growth trajectory means they can return. Now add in a multiplier of 2.2x because your team is a group of badasses and your contracts last 3 years, and bam your company is worth $11mil. Because tech markets have high growth potential (Uber is quoting to having had doubled their growth every 6 months) it means the valuations are abnormally higher than many other businesses. How many hair salons do you know that are doubling revenue every 6 months and have relative businesses who have shown similarly consistent growth in that market? All things being equal, the question ultimately becomes "what part of the hockey stick am I on?".

johnrob 12y ago

I haven't seen any evidence that suggests starting a company during a boom economy makes it easier to succeed. It does make it easier to get a salary while failing though (which is better than just failing and getting nothing).

bthomas 12y ago

A lot of the "real money" startups generate is from selling services to other startups and tech companies - particularly in the YC ecosystem. It's possible that revenue will slow in a crash and start a nasty cycle.

timr 12y ago
That's exactly what happened during the 2000 crash -- much of the "revenue" being booked by internet companies was imaginary (in the form of contract swaps), and much of that was driven by intra-industry advertising. Everyone was paying everyone else to advertise, and it all fell apart more quickly than you'd expect given top-line revenue numbers. I suspect something similar will happen this time around -- there will be a slowdown in the real economy for some unpredictable reason, and the imaginary, startup-servicing-startups economy will implode.
7Figures2Commas 12y ago
This is an important observation. There are absolutely angel and venture-backed startups with "real" revenue (fewer with actual earnings), but if you look closely, it appears that a non-negligible percentage of them derive a not insignificant portion of their revenues from sales to other angel and venture-backed startups. More broadly, an even larger number of startups are also indirectly dependent on the current landscape, as they operate in regional markets where consumption is being driven in large part by the influx of capital into tech. There's nothing wrong with building a business that takes advantage of these types of situations, but my sense is that a lot of the entrepreneurs running these types of companies aren't consciously aware that they're the beneficiaries of an environment that will eventually change. As such, they're not at all focused on trying to diversify their revenue base and to be frank, it many cases there really isn't an opportunity for them to do so anyway.
tomasien 12y ago
To YC's credit, it's incredibly hard to sell anything to the YC ecosystem from outside of it, because they already have chosen options from inside of it. Yet another reason to give radical differentiation a shot if you can stomach it.

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nostrademons 12y ago
He's saying that the supply of investment dollars is going up faster than the supply of startups.
- Permit 12y ago
  Yup, I completely misread that. Thanks.

raldi 12y ago

This kinda looks like a vicious / virtuous cycle: * Interest rates are kept low primarily because of the unemployment crisis. (Right?) * But then that encourages capital-holders to invest in, among other things, tech and startups. * And then those companies invent things that make more jobs obsolete, causing unemployment to remain high. Are my assumptions correct? What breaks the cycle? Or will it spiral out of control until we decide it's time to stop worrying about unemployment and just start paying everyone a basic income?

Domenic_S 12y ago
> stop worrying about unemployment and just start paying everyone a basic income? What I've never understood about BI is how it works for the middle class. Consider: a cohabiting couple each work entry-level tech jobs and bring in a combined $100k. They buy a condo together, maybe a couple of halfway decent cars. They're being responsible. Then, economy tanks/tech bubble bursts/etc and they have to live off their BI which if I understand correctly should fall somewhere in the $15k/year range each, so $30k total. How do they pay their bills? In other words, what good is $15k/year when you've been living on $15k/month? Or $7k or $5k/month? It's better than a poke in the butt with a sharp stick, but it's just delaying the inevitable, isn't it? If then BI is instead mainly for the low-income portion of society, well, we already have that -- it's called welfare/social security/disability. I'm missing something.
- stonemetal 12y ago
  > but it's just delaying the inevitable What do you see as the inevitable? It wouldn't prevent them from losing something, but it would be the difference between the bottom being living under a bridge completely destitute and living in a shabby apartment until they got back on their feet.
- nostrademons 12y ago
  Then they adjust. I think the point of BI is to keep you from starving. The idea is that no matter who you are or what your station is in society, you should be able to afford food, a roof over your head, and basic medical care. It's not to maintain your social standing in life - someone who has a job will rightfully have a higher standard of living than someone who doesn't. And you shouldn't expect it to be a comfortable middle class existence, you should expect it to involve living like the working poor today - a cramped apartment, not much in luxuries, public transportation or long commutes. But it takes the stress out of simply existing. The idea is that it's set at a level where you're not going to die, you're not going to end up homeless, you're just not going to be very comfortable. As for how it's different from welfare/social security/disability - I usually see it pitched as a way of unifying all of those (and the EITC), so that people don't fall through the cracks because they don't know how to sign up or what they're entitled to. It'd save on administration costs as well.

jwheeler79 12y ago

sam, go take some time and read about the shoebutton complex

webwright 12y ago

"Resist the urge to raise and spend too much money. The track record of companies that raise $30MM or more in their first round is bad." Q: Is the track record bad, or do they just fail louder than the ocean of companies that raise small amounts of $ and then quietly die? It'd be interesting if someone could prove that a large raise actually hurts your chances, but for a disciplined/veteran founder (who would raise a lot but spend it thoughtfully rather than recklessly), it seems like it shouldn't. Edit: http://www.alleywatch.com/2014/02/the-10-biggest-series-a-rounds-of-all-time/ http://www.alleywatch.com/2014/02/the-10-biggest-series-a-ro... - "All of the companies are still operational in some capacity."

rqebmm 12y ago
It may also be related to the fact that the get-big-quick scheme is inherently risky in order to return the necessary rewards. If you're raising a ton of money you have to be a home run, and that means you may pass on moderately profitable opportunities in order to keep looking for insanely profitable ones.
- webwright 12y ago
  If you're raising ANY institutional money, the expectation is trying for a home run (though most expect the process to take 7+ years).
  - rqebmm 12y ago
    sure, but if you haven't taken a ton of money, you have the opportunity at some point to take a strategy that turns a small, steady profit now instead of being continually forced to doubling down on being the Next Big Thing
    - prostoalex 12y ago
      Good luck aligning those goals with investors'. Most of them signed up for the Next Big Thing, if they wanted a small steady profit, they would've bought a condo and rented it out.

Apple2047 12y ago

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Apple2047 12y ago

308 00757 Huawei. Psix U06

Im_Talking 12y ago

I don't know what this article was trying to convey. Valuations are a subjective airy-fairy number and, in reality, based on the strategic need of a buying entity. For example, when I was in the process of selling my last business I had 3 offers. 2 offers were from companies that wanted me obviously but didn't need me strategically, therefore their valuations were low. The 3rd offer was from a company who had a hole in their product-line and my tools fit perfectly in that hole, hence their perception of my company's value was much higher. So find businesses which have a strategic need (or convince them of such need). Also, I would assume but have no evidence that strategic acquisitions have a higher success ratio than purely financial acquisitions. And just like salespeople should 'always be closing', business owners should 'always be exiting'.

namenotrequired 12y ago
> And just like salespeople should 'always be closing', business owners should 'always be exiting'. That's interesting, could you expand on that a bit? Do you mean you should always have a few good exit scenarios prepared (e.g. keep a few potential acquirers interested) in case you need one?
- Im_Talking 12y ago
  Sure. A business should always be prepared for outside interest meaning that you should have up-to-date financials that you can give-out anytime which show the summary information and overall financial trend, have no unusual liabilities like a unpaid tax liability, systems in-place to automate business functions (so a potential acquirer can see an efficient organisation), all employees/customers on some kind-of contract, no IP issues (all B2B relationships under contract). So any business with interest can spend a minimal time in due-diligence and see an efficient, professional organisation with no skeletons. At the same time, the goal of business is to exit, either via a buyout, or IPO, or whatever. No one wants to own a business that is unattractive for acquisition or investment, since these businesses just fade-away over time. So the directors need to continually look for potential strategic relationships; a) because these are obviously potential customers, and b) because they are potential acquirers who will pay top-dollar for your business. This means that they will forget any standard valuation formulas ('X' x sales, 'Y' x EBITDA, whatever) and look at their overall strategic need for what your business will bring to them. And, most importantly, you need to communicate with them on this strategic level... so you need to do your research and keep your ears open to understand their pain points, and strategic needs. By keeping your house in order, looking at the strategic level, and trying to elicit the interest of those businesses who 'need' you, you may get yourself in the perfect situations where you have competing bids, or the interested parties start to think (with your gentle prodding, of course) of the pain if you were bought-out by their competitor, etc. These are the ideal situations. But they don't happen by themselves, hence my line: always be exiting.