Venture Capital Valuations
I follow @howardlindzon on Twitter. He’s an entrepreneur and runs a successful seed stage investment firm, Social Capital. He’s a student of markets and has a great sense of humor. Makes for a fun and worthwhile follow.
Howard is currently beating the drum that seed/early stage valuations have not yet caught up the reality of the markets. Founders are seeking 2021 valuations despite dramatically changing public market conditions. He’s recently written that he’s mainly on the sidelines in public equity, and suggests he’s very cautious in the venture markets, based in large part on valuation.
I agree with Howard. There are plenty of “hot takes” on Twitter that downturns are the best time to invest, great companies are made in hard times, and investors who are backing off now are proving they are tourists in the venture markets. There is of course truth in these statements, but still patience is required.
In the past two months, I’ve seen pre-seed and seed stage startups raising money that have terms which reflect the current market, but I’ve seen an equal number that do not. It runs the gamit from a SAFE with a $5M cap for a company that has a working product and a few customers, to companies not yet in the market with uncapped SAFEs (until the market convinced them otherwise) to SAFEs with $15M caps. Of course there can be various reasons for differing financial terms for companies in a similar stage of development, but I believe the biggest explanation for the divergence is a lack of understanding that we are moving from a long period of venture capital abundance to a period of scarcity. I am not at all suggesting founders create cap tables that will, over time, be so dilutive to founders to eliminate sufficient motivation to do the hardest job in business. But, as capital becomes more scare, founders also do not want to miss their opportunity to secure that capital by misunderstanding market conditions.