I have been around long enough to have lived through (and survive!) the original dot com bubble and ensuing crash. With all the craze and frenzy around social media, sharing economy and app start-ups these days, it’s starting to feel like the dot com era all over again. A rush to fund just about any start-up based on insane valuations no matter how viable the business.
As an investor myself, I’m the business plans I'm looking at (if you can call them business plans at all) have me scratching my head. Start-ups with little or no IP, no customers, no revenues, no obvious monetization model and years of projected losses looking for seven figure seed rounds based on $10M+ valuations. And yet it appears investors are willing to throw money at these companies in droves. Just look at Angel List…it’s crazy. I’m all for investment in innovation and realize that of the thousands of start-ups that get funding, a few may emerge as the next Google or Facebook. One of the biggest differences this time around is that VC are not the only players. Thanks to crowd funding. Every Tom, Dick and Sally can throw money at these start-ups. I just wonder how long this can keep going. Is this the next bubble to burst?
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One thing to recognize on "valuations" is that they are based on the traditional 10x payout in 3 years and the percent of the company a certain sized investment buys you. This isn't exactly an accurate valuation given how dilutions and the right to force a sale etc actually convey.
Another way to look at high valuations, is that there perhaps is a dearth of quality investments so investors are being forced to buy in at more expensive (to them - cheaper to the startups) price points
IOW just because $3 million buys you 30% of the company doesn't mean that the company valuation is actually at $10 million. What it really says is that the investors think that in three years they can sell the company for at least $30 million. Remember that the investors get paid first - up to that 10x mark.
now from $3 million to $30 million in 3 years is a CAGR of 216% for those 3 years. IE just over doubling every year. That's not undoable for a decent startup.