The Non-Valley Valuation Discount

One of the more frustrating concepts for entrepreneurs outside of Silicon Valley is the non-Valley valuation discount. With numerous high-profile valuation announcements, especially the excitement around unicorns (startups with a valuation of $1 bill or more), it feels like everyone is getting amazing valuations, especially as a multiple of current revenues. Only, if you peel back the layers, the startups outside the Valley that are getting the big valuations have either a) a successful, serial entrepreneur that’s already had a big exit (e.g. Josh James of Domo), or b) insanely fast growth and market adoption (e.g. Yik Yak).

Here are a few reasons why there’s a non-Valley valuation discount:

  • Plane Travel – VCs usually invest in one or two companies per year, meaning the bar is already extremely high to do a deal, and getting on a plane, especially multiple planes (e.g. a city without direct flights to SFO), results in less competition for a deal, and thus a lower valuation
  • Talent Networks – VCs want to be value-add, in addition to money, and a major benefit is their network of potential employees, advisors, and industry connections, most of which are where they live
  • Swinging for the Fences – VCs that aim for homeruns pay higher valuations compared to ones that play more for singles and doubles, because the total addressable market weighs heavier in their decision making process

Will every non-Valley startup get a valuation discount? Like my favorite economics professor at Duke, David Johnson, would always say: the answer is Bob Dole’s underwear — Depends. Like it or not, there’s a real non-Valley valuation discount that most entrepreneurs experience first-hand when out raising money.

What else? What are some other thoughts on the non-Valley valuation discount?

One thought on “The Non-Valley Valuation Discount

  1. Not only for fund raising but the same holds true for exits. And, not just valley companies but NYC alley companies. Money goes where the action is. I think it is worth it to expand to major markets to tap into those valuation opportunities and use ATL as a back end hub. We did this for Blinq, 360i, and Atlanta. There is a certain statistical and emotional bias supporting the major markets in delivering home runs.

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