
Valuations - moritzplassnig
http://blog.samaltman.com/valuations
======
hglaser
"It turns out to be really good for a company to have a board -- it focuses
the company if everyone knows they have to present the key metrics to
outsiders once a month. ... If I could ask VCs for only one thing in this new
world, it’d be to keep showing up for board meetings."

This is very interesting. If ownership percentages at Series A are trending
down, and investor time & emotional investment per company is trending down as
a result, but having outside accountability predicts success, then I wonder
how the best companies will replicate outside accountability.

Put another way: How could you hack a replacement for a board meeting?

I'm a funded entrepreneur without a board. I've tried nominating advisors
and/or very-helpful angels as our "pseudo-board" and meeting monthly. This
didn't help very much: There's something about having a lot of skin in the
game that makes board members really prepare, take it seriously, and summon
courage to have hard conversations with CEOs when things aren't working.

The one thing that worked pretty well was bolting a whiteboard over the desk
area with this month's single goal (a revenue number, natch) and value so far.
I don't have any board experience to compare it to, but it certainly keeps us
focused.

Anyone else have ideas that have worked, or might work?

~~~
yesimahuman
We just did a late-seed round from a VC firm and didn't set up a board.

Something that has worked for us is doing a bi-weekly Google Hangout that has
no agenda. The rule is no one prepares for it, but we just talk about stuff at
a high level. So far it's been really helpful. We don't feel unnecessary
pressure to prepare decks with stats and metrics on things that aren't
important or will be changing quickly (plus I have the key ones memorized
anyways), yet we communicate frequently enough that issues can be tracked
closely and fixed.

It also works that we had only one firm in the round so coordinating it is
easy. Might not work if you have lots of angels or other investors.

~~~
mncolinlee
While it's an interesting approach that helps the founders by providing
advice, no metrics doesn't do much for accountability.

How do you ensure someone points out the digital elephant hiding in the Google
Hangout room?

~~~
yesimahuman
Of course we talk metrics, we just don't prepare them formally. And we don't
have to because our dashboards are pretty much real time anyways (which we
sometimes jump into through screen share).

------
bthomas
A lot of the "real money" startups generate is from selling services to other
startups and tech companies - particularly in the YC ecosystem. It's possible
that revenue will slow in a crash and start a nasty cycle.

~~~
timr
That's exactly what happened during the 2000 crash -- much of the "revenue"
being booked by internet companies was imaginary (in the form of contract
swaps), and much of _that_ was driven by intra-industry advertising. Everyone
was paying everyone else to advertise, and it all fell apart more quickly than
you'd expect given top-line revenue numbers.

I suspect something similar will happen this time around -- there will be a
slowdown in the real economy for some unpredictable reason, and the imaginary,
startup-servicing-startups economy will implode.

------
RKoutnik
It's interesting to see a post discussing how free VCs are in their
investments as I'm sending out job applications because we couldn't make it
past the Series A crunch despite big-name customers and ex-FB/Googlers on the
founding team.

Make no mistake, VC firms may be increasing the capital they're investing in
the markets but by no means does that translate into "everyone gets a free
ride".

------
meritt
Is there a decent way to calculate valuation? We're starting to be approached
with merger/acquisition talk and we're unsure on how to best determine our
value in that scenario.

We're a 2.5 yr old company, annual revenue for this year forecasting to $1.1M.
(2013 was $360k, 2012 was $60k). We're a team of 5 salaried employees
(founders included), bootstrapped, fully employee-owned and steady revenue
growth with very low operational costs.

~~~
mbesto
It depends.

Generally speaking valuation is speculative. Think of it this way - a gallon
of milk is priced at $3 because that's the price people are willing to pay for
it. If it was $10, no one would buy it and if it was $0.01, they'd run out of
supply. Same thing goes for business. The valuation is whatever people are
willing to pay for it. If I buy milk for $3 it's because I know if I consume
foods right now it will give me energy so I can do more things later in the
day. Some people create a story speculating that a particular gallon of milk
has the ability to give you twice the energy, so they'd price it at $6. These
stories turn out to be true sometimes and sometimes not. Hence, why today
valuations are considered crazy because everyone is painting a unicorn story.

A few factors go into valuing a company, which potentially aid the craze:

1\. There is extremely low liquidity in non-public markets for investing. In
other words, you don't have a millions of people in the US investing in
startups every day. In a perfectly elastic market, valuations are 100%
correct. Due to the high liquidity and number of actors, public markets are
much better at reaching perfect elasticity whereas private markets are not. In
other words, less actors dictating how much they are willing to pay for
something means higher deviations from the true price.

2\. Many tech companies are irregularly (irregular in relation to existing
companies) evaluated today because they do not follow traditional investment
metrics. This is largely set by precedence. When Facebook and Google IPO'd,
the investing community was fairly clueless as to how to evaluate these
companies. The metric they've chose is DAU/MAU because it translates into how
much attention "land" they can acquire to resell to advertisers and hence
increase revenues and profits. Now that these are "the metrics" it means every
other "tech startup" is in a land grab to attain those numbers quicker anf
faster than before. This is why Instagram and WhatsApp had such high
valuations...their DAU/MAU's were crazy high and growing at faster rates than
Facebook itself.

Generally, the larger investing community values companies based on earnings.
EBITDA is usually a popular metric to do this, but one metric can't dictate
_everything_ about the valuation. Valuations are based on a series of metrics,
a multiplier, all based on the speculative return of buying the business. So
for example, a company a one-year $1.1m budgeted forecast might be speculate
to be worth $5mil simply because the revenue growth trajectory means they can
return. Now add in a multiplier of 2.2x because your team is a group of
badasses and your contracts last 3 years, and bam your company is worth
$11mil.

Because tech markets have high growth potential (Uber is quoting to having had
doubled their growth every 6 months) it means the valuations are abnormally
higher than many other businesses. How many hair salons do you know that are
doubling revenue every 6 months and have relative businesses who have shown
similarly consistent growth in that market?

All things being equal, the question ultimately becomes "what part of the
hockey stick am I on?".

~~~
pbhjpbhj
> _If it was $10, no one would buy it and if it was $0.01, they 'd run out of
> supply._ //

Do you think? Milk is a pretty much fixed use rate for homes I feel - low cost
milk is probably more a loss-leader than anything else. If there's a crisis in
the dairy industry those who can afford to pay $10 probably will for quite a
time. The reason my supermarket doesn't charge more is competition. Milk is
fungible, largely, hence competition plays a more important role [we buy
Organic milk wherever possible however]. Most tech isn't so fungible.

I guess how that feeds in to your valuation analysis is that USP is important?
Even if your business amounts to just another messaging app, or another photo
app, you can have a USP - like Whatsapp's user base?

 _... if milk were 1¢ I 'd take up cheese making; cheese is so expensive._

~~~
cma
How well will $10 milk compete against $2 soymilk?

------
webwright
"Resist the urge to raise and spend too much money. The track record of
companies that raise $30MM or more in their first round is bad."

Q: Is the track record bad, or do they just fail louder than the ocean of
companies that raise small amounts of $ and then quietly die? It'd be
interesting if someone could prove that a large raise actually hurts your
chances, but for a disciplined/veteran founder (who would raise a lot but
spend it thoughtfully rather than recklessly), it seems like it shouldn't.

Edit: [http://www.alleywatch.com/2014/02/the-10-biggest-series-a-
ro...](http://www.alleywatch.com/2014/02/the-10-biggest-series-a-rounds-of-
all-time/) \- "All of the companies are still operational in some capacity."

~~~
rqebmm
It may also be related to the fact that the get-big-quick scheme is inherently
risky in order to return the necessary rewards. If you're raising a ton of
money you have to be a home run, and that means you may pass on moderately
profitable opportunities in order to keep looking for insanely profitable
ones.

~~~
webwright
If you're raising ANY institutional money, the expectation is trying for a
home run (though most expect the process to take 7+ years).

~~~
rqebmm
sure, but if you haven't taken a ton of money, you have the opportunity at
some point to take a strategy that turns a small, steady profit now instead of
being continually forced to doubling down on being the Next Big Thing

~~~
prostoalex
Good luck aligning those goals with investors'. Most of them signed up for the
Next Big Thing, if they wanted a small steady profit, they would've bought a
condo and rented it out.

------
raldi
This kinda looks like a vicious / virtuous cycle:

* Interest rates are kept low primarily because of the unemployment crisis. (Right?)

* But then that encourages capital-holders to invest in, among other things, tech and startups.

* And then those companies invent things that make _more_ jobs obsolete, causing unemployment to remain high.

Are my assumptions correct? What breaks the cycle? Or will it spiral out of
control until we decide it's time to stop worrying about unemployment and just
start paying everyone a basic income?

~~~
Domenic_S
> _stop worrying about unemployment and just start paying everyone a basic
> income?_

What I've never understood about BI is how it works for the middle class.
Consider: a cohabiting couple each work entry-level tech jobs and bring in a
combined $100k. They buy a condo together, maybe a couple of halfway decent
cars. They're being responsible. Then, economy tanks/tech bubble bursts/etc
and they have to live off their BI which if I understand correctly should fall
somewhere in the $15k/year range each, so $30k total. How do they pay their
bills?

In other words, what good is $15k/year when you've been living on $15k/month?
Or $7k or $5k/month? It's better than a poke in the butt with a sharp stick,
but it's just delaying the inevitable, isn't it?

If then BI is instead mainly for the low-income portion of society, well, we
already have that -- it's called welfare/social security/disability. I'm
missing something.

~~~
nostrademons
Then they adjust.

I think the point of BI is to keep you from starving. The idea is that no
matter who you are or what your station is in society, you should be able to
afford food, a roof over your head, and basic medical care. It's not to
maintain your social standing in life - someone who has a job will rightfully
have a higher standard of living than someone who doesn't. And you shouldn't
expect it to be a comfortable middle class existence, you should expect it to
involve living like the working poor today - a cramped apartment, not much in
luxuries, public transportation or long commutes.

But it takes the stress out of simply existing. The idea is that it's set at a
level where you're not going to die, you're not going to end up homeless,
you're just not going to be very comfortable.

As for how it's different from welfare/social security/disability - I usually
see it pitched as a way of unifying all of those (and the EITC), so that
people don't fall through the cracks because they don't know how to sign up or
what they're entitled to. It'd save on administration costs as well.

~~~
ph0rque
If BI happens, there will be an entire art form developed on how to live
happily on $15k/adult/year. This is already taking place (e.g. Mr. Money
Mustache lives a comfortable middle-class livestyle with his wife and son on
$27k/year).

I consider this a good thing.

------
johnrob
I haven't seen any evidence that suggests starting a company during a boom
economy makes it easier to succeed. It does make it easier to get a salary
while failing though (which is better than just failing and getting nothing).

------
beat
What will this all means in terms of "smart" angel money versus "dumb" angel
money? If angel investing is becoming more a matter of prestige than
thrill/returns, it could become much easier to get an angel round, but at the
price of dumb investors who lack the patience or stomach to deal with the ups
and downs of startups.

I know I'm going to have to look for angel money in the next year. And when I
find my angels, I want them to be the first people I turn to when things are
hard. I want them to be genuinely helpful and supportive, not angrily
demanding to get their money back at every little hiccup.

------
sudonim
We decided not to pursue subsequent rounds of funding beyond a seed. I'm also
hearing about deals with quite cheap capital (high valuations, favorable
terms) flowing to companies near us.

For SaaS it seems you can get deals with valuations at 10x revenue and YC
Companies in SaaS are getting a premium even on that.

Cheap money can help you weather a storm and smooth over mistakes, but it also
increases your risks as a business and reduces the "successful" outcomes you
can have.

At the end of the day if your goal is to build a sustainable business, cheap
money can't guarantee that.

~~~
suhail
I'd say it's more like 20x revenue actually (assuming the stage is series A/B)

------
Im_Talking
I don't know what this article was trying to convey.

Valuations are a subjective airy-fairy number and, in reality, based on the
strategic need of a buying entity. For example, when I was in the process of
selling my last business I had 3 offers. 2 offers were from companies that
wanted me obviously but didn't need me strategically, therefore their
valuations were low. The 3rd offer was from a company who had a hole in their
product-line and my tools fit perfectly in that hole, hence their perception
of my company's value was much higher.

So find businesses which have a strategic need (or convince them of such
need). Also, I would assume but have no evidence that strategic acquisitions
have a higher success ratio than purely financial acquisitions.

And just like salespeople should 'always be closing', business owners should
'always be exiting'.

~~~
namenotrequired
> And just like salespeople should 'always be closing', business owners should
> 'always be exiting'.

That's interesting, could you expand on that a bit? Do you mean you should
always have a few good exit scenarios prepared (e.g. keep a few potential
acquirers interested) in case you need one?

~~~
Im_Talking
Sure. A business should always be prepared for outside interest meaning that
you should have up-to-date financials that you can give-out anytime which show
the summary information and overall financial trend, have no unusual
liabilities like a unpaid tax liability, systems in-place to automate business
functions (so a potential acquirer can see an efficient organisation), all
employees/customers on some kind-of contract, no IP issues (all B2B
relationships under contract).

So any business with interest can spend a minimal time in due-diligence and
see an efficient, professional organisation with no skeletons.

At the same time, the goal of business is to exit, either via a buyout, or
IPO, or whatever. No one wants to own a business that is unattractive for
acquisition or investment, since these businesses just fade-away over time.

So the directors need to continually look for potential strategic
relationships; a) because these are obviously potential customers, and b)
because they are potential acquirers who will pay top-dollar for your
business. This means that they will forget any standard valuation formulas
('X' x sales, 'Y' x EBITDA, whatever) and look at their overall strategic need
for what your business will bring to them. And, most importantly, you need to
communicate with them on this strategic level... so you need to do your
research and keep your ears open to understand their pain points, and
strategic needs.

By keeping your house in order, looking at the strategic level, and trying to
elicit the interest of those businesses who 'need' you, you may get yourself
in the perfect situations where you have competing bids, or the interested
parties start to think (with your gentle prodding, of course) of the pain if
you were bought-out by their competitor, etc. These are the ideal situations.
But they don't happen by themselves, hence my line: always be exiting.

~~~
namenotrequired
Thanks a lot, this is very insightful!

------
acabrahams
A coincidence that sama has published this the same week that a single-feature
app like Yo! announced that it raised $1m...?

~~~
raverbashing
Well, the Yo case is really eye-opening.

It seems 1Mi dollars is pocket change to some people.

1Mi dollars is a lot of money in the real world.

~~~
sillysaurus3
$1M isn't much for VCs. Yo didn't raise money from VCs, however. They raised
it from angels, and it's a lot of money to them.

Why is it hard to believe that $1M isn't really a lot of money in the context
of business?

------
jacoblyles
I recently took a trip to Asia where capital is hard to come by and startup
valuations are much lower. It seems that if VCs are having trouble finding
return, they might be well served by investing in global expertise.

Are the consumer markets so much better in America that it's worth paying 4x
valuation and competing with lots of other VCs for deals? The answer may be
"yes", but it doesn't seem obvious to me.

~~~
stock_toaster

      > Are the consumer markets so much better in America that
      > it's worth paying 4x valuation and competing with lots of
      > other VCs for deals? The answer may be "yes", but it 
      > doesn't seem obvious to me
    

Don't forget that there are known quantities of legal/tax vehicles for VC
investment in certain countries. If those things are not present, I imagine it
would increase the risk for the VC, and impact valuation and capital
availability.

~~~
barry-cotter
Don't forget political risk. Rundown of Asian countries with political risk
comparable to the US; Japan, Lorraine, Taiwan, Singapore. Countries with more
political risk but not much; India, Indonesia, Malaysia, Thailand. The second
group have much worse legal/regulatory systems for doing business. I wouldn't
plan on getting incredibly rich in any other Asian country unless I had a
friend/patron to protect me from expropriation/gangsters. And you better be
able to provide your friend with some quid quo pro orbe related tl them either
by blood or by kid.

I may be overly cynical here but that's the perspective from China.

------
budu3
> And a macroeconomic collapse—which may happen—would certainly correct
> valuations in a hurry

I wonder what the collapse will look like and what will cause it.

~~~
nostrademons
Probably not all that different from the last one. Economy starts heating up,
and the Fed begins to tighten interest rates to damp down inflation. It takes
time for interest rate hikes to make their way through the economy, so they
keep tightening. Eventually, everybody realizes that money isn't cheap
anymore, and moreover, they realize that everybody else has realized that
money isn't cheap anymore. That causes a mass stampede for the exits as people
fly away from risk.

In the last crash, the economy started heating up in 2004, the Fed started
tightening in 2005 and continued through 2006, the market hit a top in August
of 2007, there was a slow-motion recession through late 2007 and early 2008,
and then everybody ran for the exits in the summer of 2008.

This time, I think the economy started heating up in 2013, the Fed is planning
to tighten starting early 2015, it'll take about 18 months for the rate hikes
to make their way through the economy, and so I'd expect a crash around 2017.

~~~
interpares
It's starting to feel like we're permanently addicted to low interest rates.

~~~
crpatino
Indeed.

------
mrtron
Missing word

    
    
        We’re more and more A rounds happen with less than 20%
        ownership going to the investors, and fewer and fewer
        requirements about investor control over the company.
    

-> We're seeing more and more

------
jwheeler79
sam, go take some time and read about the shoebutton complex

