Valuation is the #1 cause of death for startups

One of my portfolio companies was sold today and in the end we lost a few million dollars. That's venture capital. Investing into a single startup is insanity. Diversification and double down on your winners makes this all sane and better than investing in the stock market or any other asset class from my perspective. Sure we lose some bets, but we make it up on the winners and make a lot of money for our LP investors and ourselves. See a video on portfolio construction here.

I wanted to share my thoughts of why this one company failed. Valuation. As things were going well for this company and even not so well the founder insisted on raising at a ridiculously high valuation. That put the entire venture at continuous risk. Had the valuations of each round been priced as per my advice the company would have been better funded than it was and by now would have achieved a better exit where everyone made money. Founders are cursed with an innate mis-understanding of valuation. They are born coming out of their mamas screaming about dilution but fail to understand what is happening around them and what will happen next.

I have seen other startups go for a higher valuation than they should and the result is that no funding round happened or low quality investors (idiots) participated in that round and they missed out on high quality investors that could have helped bring in revenue and intro'd the next round of high quality VCs to make it a success. I even took the time to show a spreadsheet to some of my founders showing what their ownership would look like at the time of exit if they had a $15m pre-money valuation compared to a $25m, $50m or $75m pre and the difference in percentage ownership for the founder was small. The difference on completing the round and getting rounds done every 12 to 18 months very big.

I think founders are just terminally clouded on this super important issue and this post probably can not get through their cement brains, but I can try.

In the blockchain space it's much worse. Founders in the blockchain space got away with ICOs funded by retail amateur investors in 2017 and early 2018. That's now over. Now they try to command higher valuations with VCs with the promise of rapid liquidity, but most VCs are so uninformed that they will not touch a blockchain startup. They will soon, but most are still uneducated and simply do not understand what is legitimately complex and requires some investment in education to understand. This means that the total percentage of VCs educated enough to invest in a blockchain deal is a small percentage of overall supply of VC funds. So demand for the finite supply of a blockchain equity deal is lower than a non-blockchain tech deal. So the strike price of supply / demand for that equity is lower. Yet these blockchain entrepreneurs still act as if we are in Q4 of 2017 and that their ratio of revenue to pre-money valuation should be higher than a non-blockchain deal. It is time to get realistic and ALL entrepreneurs should rethink valuation or they will be crying for real and running back to their momas. OK, thanks for letting me vent :-)