I’m frequently asked by journalists whether I think venture capital valuations are too high in the current environment.
Because the average venture capital fund returns only 1.3x committed capital over the course of a decade, according to the last reported data from Cambridge Associates, and 1.5x, according to PitchBook, I believe the answer is a resounding “yes.”
So when entrepreneurs use unicorn aspirations to pump private company valuations, how can investors plan for a decent return?
At the growth stage, we can easily apply traditional financial metrics to venture capital valuations. By definition, everything is fairly predictable, so price-to-revenue and industry multiples make for easy math.
For starters, venture capitalists need to stop engaging in self-delusion about why a valuation that is too high might be OK.
But at the seed and early stages, when forecasting is nearly impossible, what tools can investors apply to make pricing objective, disciplined and fair for both sides?
For starters, venture capitalists need to stop engaging in self-delusion about why a valuation that is too high might be OK. Here are three common lies we tell ourselves as investors to rationalize a potentially undisciplined valuation decision.
Lie 1 : The devil made me do it
If a big-name VC thinks the price is OK, it must be a (Read more...)