Valuation · Messaging

Difference in valuation from east coast to west coast...Why?

Rob Francis

September 16th, 2015

I attended a demo night yesterday in DC and one of the founders had an interesting response to a question.  The attendee asked whether the rumors of the company relocating to the west coast were true, and what was the driver(s) behind it.  Part of the founder's response was that the valuation of her 9 month old startup was 2-4x that of what was given on the east coast, and that she couldn't leave that kind of money on the table for her company and her investors.

At first it seemed like a pretty reasonable response, but after thinking about it I found it to be kind of curious.  Its a consumer messaging app, which she said would be easier and better suited to grow on the west coast (resources, capital, support groups, etc).  

Would the valuation be different, because there is a perceived better crop of tech talent in the Valley?  Or is the founder just chasing the money and "bright lights" of the Valley?

Other than that I couldn't think of a single reason why a consumer based app wouldn't have an equal chance of being successful in DC or anywhere else on the east coast.
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Michael O'Donnell Entrepreneur Advisor and M&A Intermediary for Business Buyers and Sellers

September 17th, 2015

Having started companies and raised capital on both coasts, my experience has been valuations are lower on the east coast, particularly in the SE. This is probably not true in the NE, I don't have direct experience with that ecosystem. As Roger pointed out, it's largely supply and demand at work. On the west coast, there is a lot of money chasing too few fundable deals. On the east coast, there are a lot of fundable deals chasing too few sources of venture capital.

Paul O'Brien

September 17th, 2015

Keep in mind, valuation has little bearing on actual market value.  It's a subjective judgement into which a number of a different considerations go so as to satisfy a limited number of constituents at an early (fairly immeasurable) stage.  Your value doesn't really mean anything in the context of the company getting acquired or selling shares for actual dollars until you IPO or actually get acquired. 

So consider what goes into a valuation.  Some things:
  1. What do the incoming investors think it's worth relative to what YOU think it's worth such that you can agree to terms in the cap table, future financing events, etc.   No two investors will agree because there is no right answer.  The only reason investors do agree is because those terms were set by someone (whomever spoke first) and to participate in the deal, everyone else affirms that or walks away.
  2. Public perception is a factor.  Entrepreneurs hate realizing this and investors hate admitting it but a $40M company doing the exact same thing as a $20M valued company will far more likely succeed on the merit of the valuation alone.  The press, influencers, and enthusiasts will interpret the $40M as more successful than the $20 and favor it as such.  Now, this never affects valuation to such a degree but neither is it an irrelevant consideration.  Every mind, when setting a valuation, is subconsciously thinking... what if we were "valued" just a bit more? And thus it happens.
  3. Local economy is a far bigger factor than many appreciate.  Isn't it 40% cheaper to start a business in Austin than Silicon Valley?  Employees are cheaper.  Real estate is cheaper.  So the company either needs less (lower valuation) or can fund more/longer on the same amount (higher valuation).  Consider the exact same company in both places.  Location matters.  Here's the part that warps your mind... don't misunderstand me, I'm NOT saying Austin is better because cheaper.  Actually, usually, just the opposite.  Valley companies raise more money and have an inflated valuation because of that higher cost of doing business.  Worse, or more complicating, depending on the industry and location, values vary.  A Search company in New York likely won't be valued as much as a Search company in San Francisco.  Why?  Almost all of the talent, experience, and partners in the Search industry are in Silicon Valley so given two equivalent companies, wouldn't you value the one where there is more talent, understanding, and interest a bit more?
  4. Media attention and access.  Referring again to Austin, one of the things with which we struggle is a lack of national media.  Valley had TechCrunch.  NY has WSJ or New York Times.  Media = awareness, audience, growth.  = higher value.   No?  But the media of the Valley speaks to one consumer/customer whereas the media of the east coast speaks to another.  So even though the coast have reach, a Fin/Tech company in New York is likely to earn a higher valuation because the media there understands it and helps it reach a much larger audience of financial professionals and partners.
Bottom line, there is no easy answer but the best way to arrive at your answer is to first appreciate that a company valuation isn't actually set until IPO or acquisition.... don't misunderstand that, certainly, on paper, your venture has a valuation but should you fail your value is Zero regardless of what was set on paper.  Even if you fall short and get acquired for $10M when your last round valued you at $30M, your $30M valuation was wrong, you're worth $10.    Appreciate that and you can appreciate how a valuation is a subjective, negotiated, contextually determined number used to set terms with investors.  There are any number of reasons it might be higher or lower.

Roger Wu co-founder at cooperatize, native advertising platform

September 16th, 2015

More money (demand) constant number of startups (supply) higher valuation overall ?

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

September 17th, 2015

That one startup might get a better deal from investors on one coast vs. another is not shocking. But don't extrapolate that to conclude that values overall, east vs. west, are massively skewed.

Federico Segura Catalyzing change in the financial services industry

September 17th, 2015

It helps to be in areas that are specialized in your sector. Healthcare, education reform, DC is a great area. Consumer, lean towards SF. Fintech, NYC is good. But you can go anywhere to start a company. There are sometimes better infrastructures existent in certain places for certain things.

One thing I forgot to mention, VCs on the west coast(because they have longer and better track records) are generally better funded. If you get a top dog like NEA in a deal, they need to put in a ton of money for the returns to make sense for them... Funding is starting up everywhere because it is extremely easy and cheap to start a company today and there can be the next FB or Google anywhere.

Karl Schulmeisters CTO ClearRoadmap

September 17th, 2015

"valuation" isn't really the meaningful number.   What's really going on is a question of how much cash can you get for what percent of the company.   The resulting valuation isn't that meaningful, what is meaningful is how much money that runway gives you.

And since west coast development costs are higher than east coast- I would suggest that you are likely seeing about the same amount of "runway" even though the cash amounts are different

Roger Wu co-founder at cooperatize, native advertising platform

September 17th, 2015

Yes, I wouldn't uproot the whole business for a valuation.  At the end of the day the outcome IF you are raising venture money will be pretty binary.  So a few million here and there shouldn't make or break your decision.

Federico Segura Catalyzing change in the financial services industry

September 17th, 2015

What I think people are also neglecting in the above conversation is $1 the bay area isn't worth as much as it would be in other areas. What I mean by this is software engineers are in extremely high demand out here. If the engineer is worth his weight in gold, all the big guys will want him and pay his really good starting salaries. All the top engineers are relocating from around the world to come to this area. 

While there is great talent elsewhere, there is nothing driving their salaries up. What this means is that startups naturally NEED more money to succeed here and no founder would be wise giving up 50% or more to a vc in a series A... So VC put in a chunk of money and ask for standard deals, but because the injection is higher, the valuations get inflated. 

Also, most of the money is located in the bay area(which is changing a bit). IF you are a software based company it makes sense to move out west for access to capital and talent. However, if you are a good company, you will get funded anywhere and once you start hitting certain metrics like revenue, the metrics will begin to merge.

My 2 cents

Rob Francis

September 17th, 2015

That all makes sense now, which might be the reason why VC's are looking across the continent to find better deals.   With that said, I wonder if this question of valuation would be different, if say, the startup was in cyber security or a social good category, being so close to DC?