The New Yorker has a fascinating piece on Marc Andreessen, a well known entrepreneur and venture capitalist, titled Tomorrow’s Advance Man. In addition to a number of excellent stories, the author mentions Thiel’s Paradox from early Facebook investor Peter Thiel:
When a reputable venture firm leads two consecutive rounds of investment in a company, Andreessen told me, Thiel believes that that is “a screaming buy signal, and the bigger the markup on the last round the more undervalued the company is.” Thiel’s point, which takes a moment to digest, is that, when a company grows extremely rapidly, even its bullish V.C.s, having recently set a relatively low value on the previous round, will be slightly stuck in the past. The faster the growth, the farther behind they’ll be. Andreessen grinned, appreciating the paradox: the more they paid for Mixpanel—according to Thiel, anyway—the better a deal they’d be getting.
Generally, entrepreneurs want to bring in new investors for each round of funding so that they can create an auction-like environment to get the best combination of valuation and value-add. Thiel’s Paradox is that for entrepreneurs of fast growing companies, an insider round from existing investors, no matter the valuation, results in a good deal for investors. The next time you read about a startup raising another round of funding exclusively from the existing investors, think about Thiel’s Paradox.
What else? What are some more thoughts on Thiel’s Paradox?