

Valuation as a Scorecard - ghosh
http://avc.com/2015/05/valuation-as-a-scorecard/

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JacobAldridge
I was going to say something trite like "Money is the number boring people use
to keep score."

But the piece near the end on other measurements reminded me of a key piece of
advice I learnt from my amazing sister Millie (founder of www.iamlovable.com):

"Don't place your happiness in other people or other things. If you need them
to make you happy, then they can also make you sad."

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idlewords
As much as I agree with the author's point, it's misleading to refer to "the
market" when you're really talking about a very small subgroup of people. Much
of the distortion and irreality in startup world stems from the fact that
companies are not selling to a broad market, but trying to tell persuasive
stories to a small group of wealthy investors. Using "the market" to refer to
that small group creates confusion that I worry is intentional.

~~~
hkmurakami
IMO that is still a market (if you have 1 buyer and 1 seller, you have a
market), albeit a small and illiquid one.

I think what you are getting at is that because the market for private
companies is illiquid, rife with information asymmetry, and is opaque, it is
difficult to gauge true market price.

~~~
idlewords
Yes, but I mean something else as well. We're taught that free enterprise is
the socially optimal way to allocate resources. Part of that is the assumption
that 'the market' that is doing the allocating represents a wide cross-section
of society. In this case it's a very small clique, and it takes advantage of
our cultural esteem for free enterprise and capitalism to mask the fact that
there's not a lot of contact with "the market" as we normally understand it.

~~~
krschultz
There are so many assumptions to unpack in this comment.

1) Some people think that free enterprise is the socially optimal way to
allocate resources. Many people don't. I think free enterprise allocates
resources in a financially optimal way - sometimes that lines up with socially
optimal and sometimes it does not.

2) I think it's a bad assumption to think that anything smaller than the
consumer goods market or the public stock market is "not a real market". There
are hundreds of VC firms and thousands of startups. It's a much bigger market
than most B2B products, it's probably as (in?)efficient as the job market.

3) Given the way public companies are plowing their profits into share
buybacks rather than investment, I generally hold private companies in higher
esteem than the average public company at the moment.

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erikb
Yeah, valuation is nothing. But there are numbers like cash flow, cash
reserve, company book value, and even relations like earnings to cost,
earnings to book value which can give a good inside about how strong your
company is. These numbers are much smaller than valuation, but they give a
more reliable picture. Don't evaluate like an investor, but like a (long term)
stock trader would.

PS: Sorry if the terms are wrong. There are actual terms for these numbers,
but I never learned them in English. Hope from the descriptions you can make
out which numbers I mean.

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myth_buster
I agree with Fred that it's a hypothetical number much like the unicorn and
shouldn't be used as a scorecard. :)

Having said that I wonder how the drawbacks compare with merits of raising
money at a higher valuation (not for ego boost) such as:

\- Legitimization of the business in the eyes of the customers being
onboarded,

\- Creating a buzz which introduces the company to new user base funneling
more users,

\- Providing a longer runway and helping the founders from being distracted
and wasting precious cycles trying to raise money in near future.

~~~
dylanjermiah
Also recruiting, especially for senior positions.

~~~
myth_buster
Agreed.

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hkmurakami
_> "And the markets can move on you and one day you are worth $2bn and the
next day your are worth $500mm. Did you just mess up by 75%? No. The market
moved on you.

>But please don’t measure yourself on valuation. It might make you feel good
today. But it won’t make you feel good every day."_

I wish we could give this perspective to the CEOs of Fortune 500 companies as
well.

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graycat
While broadly I have to agree with much of what Fred said there, I do have
some qualifications.

At the end Fred did mention family, etc. Here he was way too weak: A recent
phrase is "The greatest prize life has to offer", and that's husband and wife,
house and home, mother and father, with everyone busy, productive, and, thus,
happy.

"Thus happy"? One of the standard ways to be unhappy is to be idle, doing
nothing. One of the best ways to be happy is to be busy and productive.

All that said, I have three points of qualification:

(1) It can be a bit _self-serving_ for a venture partner to tell everyone
else, especially entrepreneurs, that they should not think too much about
_valuation_.

(2) I have wondered if the recent _late stage_ equity fundings with high
valuations have a _dark_ side: Maybe the end of that little process over time
stands on average to favor the venture firm: If (A) the company does not do
really well, then the venture firm still stands to get their money back via
the _term sheet liquidation preferences_. And (B) if the company does do well,
then the high _valuation_ might be seen as a starting point for negotiations
with the investment bankers on the offering price of the IPO or an M&A exit in
which case the venture firm not only gets their money back but makes a bundle
(big ROI).

(3) As has become more common recently in the press on startups, now the way
may be clear for some significant number of solo entrepreneurs with little or
no equity funding to create a company worth $1 billion just from net present
value of after tax earnings in which case all the discussion about equity
funding is next to moot.

The common example is the Canadian romantic match making site Plenty of Fish
which was long just one guy, two old Dell servers, and revenue of $10 million
a year just from ads via Google. So, that's about $10 million a year pre-tax
earnings and, thus, maybe, a company worth $1 billion.

I know; I know: From none other than John Doerr at KPCB, "Ideas are easy and
worthless. Execution is everything.". Hmm ...: Given an _idea_ , now plug
together a development computer, install a lot of free infrastructure
software, use some frameworks, etc. to write the routine software, write the
rest, the _secret sauce_ , as just ordinary code, plug together a server, plug
into an ISP, get ads from ad servers on-line, use a _content distribution
network_ (CDN) to handle much of the Internet traffic, go live, get some
revenue and earnings, maybe expand to a local colocation site or to the
_cloud_ , and grow.

So, where's this _execution_ that is not routine!

Or, for such a scenario, given a good _idea_ , the rest is routine. Then the
_idea_ and associated _secret sauce_ are "everything" and likely challenging.

Or, for a venture partner to claim that ideas are worthless looks like an
initial negotiating position to claim that what the entrepreneur has before a
term sheet is worthless.

Cute. Silly, insulting, dysfunctional, but cute.

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jonpress
I think it's important for you and your competitors to be aware of how much
value you've added to society at any given time - Your company's valuation
does that pretty well. It holds people accountable. I'm sick of hearing the
"it's outside of my control" argument when things go bad - The moment you
"lose control" of the market, that's the moment you failed. When you are a
leader in your field, there is no excuse for not understanding the market - It
just means you got lazy.

~~~
jonpress
Oops I forgot to add <sarcasm></sarcasm> tags around it. My bad.

