Some VCs are “logo hunters” who just want to be able to say they were investors in a particular company. There are other reasons why investors may not care about the valuation. For this reason, it’s a good idea to check the lead investor’s check size against the overall size of the firm’s latest fund. If a funding amount represents 1% of the fund size or less, it’s possible that the VC team may view the investment as “putting a marker down” and not worry about whether the price offers an attractive multiple. It’s also the case that a relatively small investment can relax pricing discipline in some firms. Only a test of the open market or an independent third-party valuation can accomplish this goal. Inside-led rounds happen all the time for good reasons - including making a funding process fast so that management can focus on building the business - but because these decisions are not at arm’s length, they cannot be trusted as an objective indicator of market value. This is one of the reasons why many venture capitalists prefer not to lead subsequent rounds: Pricing decisions can no longer be objective because investors are effectively on both sides of the table at the same time. They face a conflict of interest because they are rooting for the success of the startup and generally want the company’s stock price to keep growing to show momentum. Insiders are investors who have previously placed capital in the startup. The lead may be an “inside” investor already, committing small amounts or - believe it or not - simply not care. While the lead investor who set the price may be experienced, there are many reasons why the price she set may not be justified. If a big-name VC thinks the price is OK, it must be a good deal, right? Here are three common lies we tell ourselves as investors to rationalize a potentially undisciplined valuation decision. For starters, venture capitalists need to stop engaging in self-delusion about why a valuation that is too high might be OK.īut at the seed and early stages, when forecasting is nearly impossible, what tools can investors apply to make pricing objective, disciplined and fair for both sides?įor starters, venture capitalists need to stop engaging in self-delusion about why a valuation that is too high might be OK.
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