In Jeremy Liew’s post Assymetric risk he hit a nerve. In getting a response from Jeremy I don’t think that he meant it to be a negative post but an observation of a valuation scenario rather than an industry practice.
Jeremy has been an active investor with 5 investments over the past 18 months. I don’t totally disagree with Jeremy but I don’t believe investors should pass on deals due to valuation. Instead look at the available market and its growth. Right now the most confusing thing to investors is the web 2.0 market landscape. I speak to VCs all the time about web 2.0, podcasting, and the emerging video space and many investors are trying to figure out what’s going on. Once they figure out what is going on then they can put the appropriate investment plan behind that areas that they want to invest in. Then valuation analysis is appropriate. If the entrepreneur ‘on the ground’ has the right strategy, product, market approach, and ‘troops’ then the decision should be about how much ground can they take to being 1,2,3 in the sector.
Some comments on Jeremy’s blog do make good points ..
bill – July 10, 2007
It’s war out there. We fight every day to increase value. I would never give some back to the pro’s . Sure, a clump of dentists might screw you up, but, is this really a professional investor worry?
All entrepreneurs should read about the distribution of the power curve (Nassim Taleb). Think about all 100 investments these guys make, not just the one successful space shot.
Another way to think about this is whether a valuation was (not is) high or low can only be determined in hindsight — i.e. when the next round or IPO price or acquisition price is set.
Trying to determine fairness or appropriateness beforehand is difficult with any speculative investment — stocks, real estate, bottles of wine on ebay — one can always wonder whether something is truly ‘worth’ the price at the time it is paid.
Going back to the airplane analogy, you can only know once you made or missed the flight whether you made the right decision.
Conventional thinking says that something is worth what someone will pay for it — it is neither high, nor low. It just is.
Still, as a practical matter, the advice in the post is good — when one knows with some degree of certainty that there will be need to be follow on buyers, getting an unrealistic valuation may be short-term thinking with very negative consequences.