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0 pointsjjeaff5y ago0 comments

Because in a startup, valuation is generally calculated by the investor rounds rather than revenue.

An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

They wouldn't generally want to boost valuation for their round because that reduces their return. But there is probably some wisdom in hyping up valuations to get customers and future potential investors excited.

Additionally, if it is a follow-up round, they probably want to invest at a higher valuation just for their own investor confidence. No one wants to have a "down round" because it throws cold water on the hype train for all the other investors.

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itsoktocry5y ago

>An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

That's the confusing part, and it seems backwards. The valuation should determine how much money you are willing to put in for a specific ownership share. It should be an input, not an output.

reilly30005y ago

The valuation is established by the person writing the check. It’s based on their perceptions of the market and how the team is tackling it. VCs don’t really care about dividends, they care about exits. They are trying to buy part of a startup for less than they can sell it to a buyer or the markets. The financial capacity of potential acquirers and their relative need for the startup’s business drives what that check writer is willing to pay. IE the market for a startup’s equity is the input, and the valuation is the output.

brettcvz5y ago

As PG recently shared, when an investor puts money into a company it is a calculated bet that the company is actually worth _more_ than the valuation they are investing at. No one invests $1 for a 10% chance of making $10. So if the valuation goes up, it basically eats into an investors expected “profits”.

pge5y ago

While I am not going to argue that valuations are wholly rational (and specifically the fact that valuations increase with investment size), it is also true that having more capital may make the company able to accomplish more, and thus raise the expected exit value for the investor. If so, that provides a rational basis for increasing the valuation of the company when giving it more capital. (Present valuation being the discounted future valuation)

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aaronblohowiak5y ago

Outcomes are roughly binary though

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