July 18, 2005
Does Valuation matter?
You probably are thinking - Duh! of course it does.
Sure valuation matters but is it the end all and be all of all venture transactions or is it just one piece of the puzzle? By valuation I am not just referring to the price but also to terms. I was at a conference recently where a bunch of early stage venture guys were talking about how valuations have creeped up and how they were no longer seeing single digit pre-money deals. That got me thinking - why are folks so caught up with valuation?
I do mostly early stage deals (Seed/Series A) so this reasoning is confined to the early stage (middle and late stage deals are a different cup of tea.) My thesis is that if you are doing early stage deals the MOST important thing for you is to BACK a big winner. Basically your goal is to shoot for a Amazon/Google/eBay/Juniper/Verisign and you want to do everything to maximize your chances of getting into one of those deals.
Now here is the rub if you are shooting for one of these "verb" companies you are playing a high beta game which means that you are either going big or going home and in both cases valuation does not matter. Because if the company becomes big, it would not matter if you did the deal at $5 pre or $15 pre e.g. Amazon was done at $27 pre, Google was done at $60 Million pre, Netscape was done at $21 Million pre, and eBay was at $27 Million pre, etc. And if the company bombs then again valuation does not matter because you ain't gonna get much back.
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Basically your goal is to shoot for a Amazon/Google/eBay/Juniper/Verisign and you want to do everything to maximize your chances of getting into one of those deals! [Read More]
Tracked on Aug 8, 2006 3:16:38 AM
Tracked on Aug 13, 2006 12:38:18 PM
Hi Venky! Great blog you got. Keep it up, give it some time and it'll kick ass. Thanks for writing.
There's a good podcast which you might like. Keith Benjamin of Levensohn Venture Partners has a few things to say about your investment thesis.
Good luck with the whole verbs thing ;-)
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