The Startup Valuation Anomaly Phase

Tech startups are a strange thing when it comes to valuations in the early days. When you’re just starting out, have great social proof, but no revenue, there’s a real chance that the valuation is higher than when you’ve started to monetize things and have some revenue. Investors and potential acquirers see the startup and make educated guesses as to how fast the business will scale, potential gross margins, and monetization opportunities. Since these are educated guesses, there’s a good chance they won’t pan out as predicted, but no one knows.

So, if an investor or potential acquirer comes along and offers a high price based on hype, social proof, herd mentality, or whatever, there’s a chance the entrepreneur will be staring at the deal and thinking that the startup is being valued at such a high price, it’ll take a couple years to get back to that value, and possibly many years (e.g. Instagram). For startups in hot areas or great timing, there’s a startup valuation anomaly phase.

What else? What are your thoughts on some startups having a valuation anomaly phase?

One thought on “The Startup Valuation Anomaly Phase

  1. In the 100 deals i saw from 2000 to 2006, 95% of the first round valuations were too high. i.e., the second round was a “down” round.

    I love what Warren Buffet says about deal making. In every deal there is a sucker. If you don’t know who the sucker is, then it’s probably you.

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