VCs… We Could Be Better at Pricing Rounds.

Blog post by Collin West

Over here in the Kauffman Fellows Research Center we have a deep well of data that we have struggled to find time-efficient ways to share with startups and VCs.

So, as a beta, I am going to blog a few short posts and keep the analysis light.

This one is pretty interesting. And we all know it’s true:

VCs are *generally* not very sophisticated when pricing a new round. 

This is reasonable given the dynamics involved in pricing a company – competition from other VCs, termsheet levers designed to adjust the effective post-money in order to achieve a certain price, fewer comparables than public markets… the list goes on.

But, I think the below is pretty fun to dig into. We built a chart displaying a sample of post-money counts from our global dataset which includes over 240,000 rounds. These rounds closed between the years 2008-2018. The result was far from a smooth and efficient curve – there are distinct spikes at most $100M intervals along the X-axis.

Source: Kauffman Fellows Proprietary Dataset.

Us humans sure have a gravitational pull toward nice round numbers!

In fact, this is probably an example of Round Number Bias which could hurt a VC’s returns over time. For example, we do not see many companies valued at a $900M Post-Money. But we do have many $800M and $1B post-money counts. Perhaps the fabled Unicorn $1B mark has too much of a gravitational pull to ignore. So, if a VC were to round up from $900M to $1B in valuation without adding in new protections to achieve a nice round number their returns would certainly be hurt.

To extend this analysis a bit, we also split the data up by Geography, Sector, and Time and the results did not vary by much. However, one comparison stuck out to us that left us scratching our heads.

When comparing a similarly sized sample of Information Technology and Healthcare companies we found what looks like a stronger pull toward round numbers for IT companies than Healthcare companies.

I would love to hear comments from readers about this:

• Do you believe Healthcare has more efficient pricing mechanisms than Information Technology?
• Is this just a lack of high valuations in the space? What may be happening here?

Comment and share! Happy to answer questions. You can also engage with me on Twitter.

Thank you,

Collin West and the Kauffman Fellows Team.