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Your misconception here is to think that valuation means how much the company is worth today. Or to read it as an intrinsic signal of the difficulty of creating

Your misconception here is to think that valuation means how much the company is worth today. Or to read it as an intrinsic signal of the difficulty of creating what the company has created so far. It's neither. Early stage investors make calculated bets on teams that they think can succeed in the long run. Valuation is a technicality, and depends on how well founders can pitch their idea, and how desired they are by other competing VCs. Ultimately, what really matters, is the potential of the team, and the size of the space they're exploring. In this case, Sequoia is not investing in a simple messaging app that can be "replicated in a couple of hours" (regardless if that's true or not). They're giving money to a team they believe can do something great with it. And one that spent 3 months being personally trained by Paulg plus some of the best minds in the startup ecosystem, to seize opportunities and create something big. From a purely statistical perspective, 80% of investments will fail. It's very likely that Magic will fail, too. But the 20% that succeed will pay for all the other ones. For anyone interested, I strongly recommend "The Launch Pad: Inside Y Combinator" [1], by Randall Stross. It shows in incredible detail the ins and outs of YC, and explains why angels and VCs do things that seem, at face value, crazy for outsiders. It will give you a totally different perspective on deals like this. [1] http://smile.amazon.com/Launch-Pad-Inside-Combinator/dp/1591846587 http://smile.amazon.com/Launch-Pad-Inside-Combinator/dp/1591...

bhayden 12y ago
So essentially they really liked the team working on Magic and are paying millions to, in a sense, employ these people?
- nijiko 12y ago
  pretty much.
- joedavison 12y ago
  Yes, and to let those people deploy their capital profitably for them.
- zaroth 12y ago
  Not even that! Literally the valuation is a figment, especially without knowing the associated terms. $12m at $40m post-money with a 3x participating preferred? Literally all we know is the team has access to $12m in the bank to spend, not on their own salary, but on building a company called Magic. After the $12m is spent they should have a company that is worth $40m. It's a bet that for every $1 the team spends they can create about $3 in value. Which at 5x revenue is to say, they can spend $12m and at the end of the day be cash flow neutral and have about $8m in ARR. Throw in a liquidation preference on that $12m and what you actually have are golden handcuffs and high expectations but the work for this team all lays ahead of them not behind them.

bhayden 12y ago

So essentially they really liked the team working on Magic and are paying millions to, in a sense, employ these people?

nijiko 12y ago
pretty much.
joedavison 12y ago
Yes, and to let those people deploy their capital profitably for them.
zaroth 12y ago
Not even that! Literally the valuation is a figment, especially without knowing the associated terms. $12m at $40m post-money with a 3x participating preferred? Literally all we know is the team has access to $12m in the bank to spend, not on their own salary, but on building a company called Magic. After the $12m is spent they should have a company that is worth $40m. It's a bet that for every $1 the team spends they can create about $3 in value. Which at 5x revenue is to say, they can spend $12m and at the end of the day be cash flow neutral and have about $8m in ARR. Throw in a liquidation preference on that $12m and what you actually have are golden handcuffs and high expectations but the work for this team all lays ahead of them not behind them.