Correct me if I'm wrong, but what everybody seems to be saying, but not outright, is that early valuations are basically bullshit designed to make everybody think that the company is worth more than it is, immediately after the early valuators got their money in.
Like the guy that buys a car for $2,000, turns around to sell it and tells potential buyers that they can't accept an offer for $4,000 because they'd be taking a loss.
No. There are a few reasons why this isn't an apt characterization:
- Unlike somebody who flips a car, early investors are (typically) not selling their shares to later investors. Investors in different rounds do have differing interests, but they're not diametrically opposed like the interests of buyers and sellers
- The article is about high valuations in late investment rounds, not early ones.
- The reason for the high valuation is that risk in the late-round investments is comparatively low, not that investors want to hype the company for a future round that's even higher.
- To the extent that valuation in late rounds is "bullshit" it's because that valuation really only applies to the investors in the latest round, not to all shareholders. If somebody buys 10% of the company for $200M, we infer that the rest of the company is worth $1.8B, even though you couldn't actually sell it for that price.
> If somebody buys 10% of the company for $200M, we infer that the rest of the company is worth $1.8B, even though you couldn't actually sell it for that price.
If I understand correctly, the point is that the latest investor effectively buys between 10% and 100% of the company, depending on what it eventually gets sold for.
Yes, exactly. They have 10% of the shares but they might end up with more than 10% of the proceeds of a sale, if the sale price is less than $2B. That has an impact on the value of the remaining shares.
I think it would be more accurate to say they're getting a promise to pay back their investment with interest (the "bond-like" comment in the article), and also 10% of the company stock. It could turn out that the "bond" is more valuable, or the stock is more valuable, or they're both totally worthless.
A major difference between big early investors and retail investors is that retail investors don't get that "bond-like" guarantee. Hence there's greater risk of loss, and retail investors should value the stock much lower, but frequently don't.
Like the guy that buys a car for $2,000, turns around to sell it and tells potential buyers that they can't accept an offer for $4,000 because they'd be taking a loss.