Fred Wilson has a rich history of bringing more transparency and understanding to the venture capital world, including the dynamic with entrepreneurs, via is popular blog avc.com. Recently, there have been two especially interesting posts:
Valuations for startups, other than outliers published on TechCrunch (see Dropbox’s $4 billion valuation on $30 million in revenue), are often a closely guarded secret. One of the big advantages for traditional VCs is the opaque nature of information and the frequency of negotiating deals. Think about it: a VC might negotiate a couple deals per year while a successful entrepreneur might negotiate a few deals in a lifetime. The more information that becomes available results in a more efficient market for VCs and entrepreneurs. While VCs will always have an advantage the dynamic is much more less heavily favored for them than previously.
VCs won’t like Fred Wilson’s valuation posts because they present examples of high valuations and low VC ownership positions. Entrepreneurs, when they read the posts, are naturally going to think those valuations are representative of their startups. Note that Fred uses terms like category leaders, of which most startups aren’t.
Also, when he talks about investing $3 million at a $30 million post-money valuation, implying a 10% ownership stake, that’s not a high enough stake for most VCs to get out of bed, unless the startup is at a very late stage. Entrepreneurs expecting these valuations and VC ownership positions are going to be very disappointed. And, VCs aren’t going to like having to deal with the push-back and convincing that these aren’t normal.
I like VCs and think they are an important part of the eco-system, but I’m sure these posts are going to cause headaches for VCs and entrepreneurs alike.
What else? What do you think of Fred Wilson’s valuation posts?
David Cummings on Startups 