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Musings of a VC in NYC
Updated: 1 hour 28 min ago

Funding Friday: Chiptunes

March 15, 2019 - 7:20am

This is the kind of Kickstarter project I really like. Small, offbeat, and totally awesome. I just backed it this morning.

Categories: Blog articles

Decentralized Finance

March 14, 2019 - 9:35am

While we wait for the blockchain/crypto technology to scale to the point where it can be the foundation of mainstream consumer applications (games, social media, e-commerce, etc), there is a sector where scalability is a little less important and where blockchain/crypto is starting to show some real signs of life.

In the crypto space, it is called Decentralized Finance, or DeFi for short. It includes, of course, all of the ICO activity largely built on top of Ethereum and the ERC-20 token. But it also includes thinks like Maker which is both a stable coin and a collateralized lending sytem. The collateral for the loans is what stablizes the Maker stablecoin. We also are seeing other lending offerings develop in the DeFi world and we are seeing things like hedging, shorting, derivatives, and more, all built on a decentralized platform where there are no intermediaries, no clearinghouses, and the need for trusted third parties is much less, sometimes not at all.

This makes sense for a number of reasons. While the transaction requirements of financial services applications are not trivial, they are also not as demanding as mainstream consumer applications where millions of users are transacting with each other and the system in real-time.

It is also the case that, unlike many of the new architectures that emerged over the years (mainframe, mini, client-server, web), the blockchain/crypto space has always had money at its core and making money, transacting in money, and everyting that goes along with that has been an early use case and for most people, the driving use case for this technology.

All technologies need early use cases. I do not think DeFi will be the only thing that blockchain/crypto is good for. I think we will see blockchains scale in the next few years to allow mainstream consumer applcations to be built.

But until then, DeFi is a good place to hang out. It uses all of the same technologies, architectures, and value systems that we have come to know and love in crypto. You can learn to build applications, use applications, and generally come up to speed on the sector while serving real customers, building a business, and, hopefully, making money.

Categories: Blog articles

The Diverse Syndicate

March 13, 2019 - 7:46am

Startups are generally not funded by just one investor. They are usually funded by a collection of investors; the angel syndicate, followed by the seed syndicate, followed by the VC syndicate.

This gives the founder the opportunity to gain insights and advice from a group of people versus just one.

I was sitting next to a VC last night who brought up the age old question – operator vs investor? She is a successful early stage investor who has never been an operator.

My answer to her question was “both.”

Yes it is fantastic to have people in the syndicate who have been or maybe still are operators. They will be able to help you with all sorts of management issues.

But it is equally important to have the investor mindset in your syndicate. Investors tend to be very attuned to financial issues like burn rate, when to raise, from whom, etc. They also understand market positioning, strategy, and similar stuff very well.

While you are at it building a diverse investor syndicate, try to get women, minorities, and other forms of diversity into your syndicate.

Treat building an investor syndicate like building a management team. What you want is a lot of differing strengths not a bunch of the same strengths.

Categories: Blog articles

Market, Team, Product

March 12, 2019 - 6:25am

I get asked frequently whether it is better to back the team or the product (the “jockey or the horse”).

It is not that simple in my view.

When I think about the big wins we have had over the years, they almost all exhibited a combination of a large market, a great product, and a talented founding team.

Some investors feel that the team doesn’t matter. They believe that you can replace the team if everything else works out. But I don’t think everything else works out if you don’t have a talented founding team.

Some investors feel that product doesn’t matter. They believe that you can pivot into something else if you have a talented founding team. While that is certainly the case, pivots are expensive in terms of capital, time, and focus. I would not choose to go through one given the choice.

And large market is critical. You can build a nice business in a small market, but you can’t build a big business in a small market.

My point is you really need all three, market, product, and team, to get the big wins that the venture capital model requires.

And in terms of finding the best opportunities, I would start with large markets, go searching for teams working in them, and writing checks only when you find talented teams working in large markets who have built excellent products.

Categories: Blog articles

The Hidden Cost Of Extending Option Exercise Periods

March 11, 2019 - 7:11am

Many people in startup land believe that the answer to the challenges around forcing departing employees to exercise vested options is to simply extend the option exercise period to the maximum (ten years) allowed by the IRS.

It certainly is one of the techniques that are available to companies and one that a number of our portfolio companies have adopted. Another option, and one that I prefer, is for a market to develop around financing these option exercises (and the taxes owed) when employees depart.

However, if you are thinking about extending the option exercise period for departing employees, you should understand that it will cost your company something.

Here is why:

Options are worth more than the spread between the strike price (the exercise price) and what the stock is actually worth. They have additional value related to the potential for the stock price to appreciate more over the life of the term of the option.

There is a formula that options traders (and companies that issue options) use to value options. It is called the Black-Scholes formula.

If you click on that link, you will quickly realize that the math used in the Black-Scholes formula can be complicated. But fortunately, there is a neat little web app that I frequently use to estimate the value of an option. It is here.

So let’s say that your company is issuing options at $1/share (your 409a) but your most recent financing was done at $2/share. Then a four year stock option is worth roughly $1.25/share.

If, on the other hand, you offer a ten year option exercise period to your employees, the value of the option rises to $1.52/share, reflecting the longer period of time that the stock could appreciate over.

That is a 20% increase in the cost of issuing stock options. You could mitigate that by reducing the number of options you issue to incoming employees by 20% but that might make your equity comp offers less attractive to the “market” because incoming employees won’t value the longer exercise periods appropriately.

Stock based compensation costs are real costs even though many in startup land think of options as “free” because they don’t cost cash. The accounting profession has attempted to estimate these costs and companies do put stock based compensation costs on their income statements. If you go with ten year exercise periods instead of four year exercise periods, expect those expenses to go up significantly. Twenty percent is just the amount in my example. It could be larger, possibly as high as fifty percent (or more) if your exercise price is a lot closer to the current value of your stock.

This extra value of a ten year stock option versus a four year option is known as “overhang” by investors. It is the cost of carrying a group of people who have a call option on your stock but don’t have to pay for it for a long period of time. Generally speaking investors don’t like a lot of overhang in a stock.

All of that said, employees are the ones who create value for shareholders. They need to be compensated for that. And I am a fan of both cash compensation and stock based compensation. I like to see the employees of our portfolio companies well compensated in stock. That has a cost and everyone should be well aware of what it is. Longer exercise periods increase that cost. I would rather put more stock in the hands of the employees of our portfolio companies than give them longer exercise periods. But regardless of where one comes out on that tradeoff, it is important to recognize that it is a tradeoff. There are no free lunches, not even in stock option exercise periods.

Categories: Blog articles

The Warren Breakup Plan

March 10, 2019 - 7:48am

Elizabeth Warren made news this weekend with her plan to breakup Google, Amazon, and Facebook (and also Apple).

Let me first say that I am sympathetic to Warren’s position. I particularly don’t like the way that Google, Apple, and Amazon use their market power in search and in their app stores to display their own products. The mobile app stores, in particular, have always seemed to me to be a constraint on innovation vs a contributor to it.

However, as you might imagine, I don’t love her proposal. I don’t think breaking up companies solves anything. And lots of rules on paper don’t either.

What we need is a competitive marketplace where new entrants have a chance to beat out old incumbents.

And I think we are on the cusp of that with crypto and the innovations in and around it.

This tweet exchange explains my high level view here:

we are on the cusp of a new architecture, based on a user's control of their own data, and monetized via protocol tokens, that will unseat all of these monopolies in time. the massive increase in ICO-based fundraising, largely outside of the US, is the counterweight to this.

— Fred Wilson (@fredwilson) March 9, 2019

I also quite like Mike Masnick’s much longer take on Warren’s plan.

What we need are policies that make it easier for startups to raise capital (like supporting ICOs instead of clamping down on them) and policies that open up the proprietary data assets of the big incumbents (like giving users control of their own data assets). Those sorts of things along with the never ending march of technology will do the trick I think.

Categories: Blog articles

Audio Of The Week: Ayah Bdeir

March 9, 2019 - 8:56am

I wrote a bit last Monday about the 60 Minutes piece last Sunday night about getting to gender equity in STEM education. My message in that blog post was that there are many innovators in this sector and not everyone will get the credit they are due.

Ayah Bdeir, who was left on the cutting room floor on that 60 Minutes piece, had a different message and one that I understand and appreciate.

Ayah is awesome and I want to shine a light on her and her work and there is no better way to do that than to repost her conversation with The Gotham Gal from last year.

Categories: Blog articles

Funding Friday: Make Your Own Robots

March 8, 2019 - 8:17am

I just backed this project. I like the part in the video where the robot passes them spices for their dinner.

Categories: Blog articles

The Business Model Pivot

March 7, 2019 - 8:25am

I saw Zuck’s post on pivoting to private interactions from public posts yesterday and I had a flashback to Bill Gates’s Internet Tidal Wave memo to his company almost twenty-five years ago.

I have always seen a lot of Gates in Zuck. They both have this incredible ability to see someone else’s product and realize that they need to build their own version of it.

But copying someone else’s product is a lot easier than copying someone else’s business model, particularly when you already have a fucking great one that makes you and your shareholders billions of dollars a year.

It will be interesting to watch Zuck do what Gates was ultimately unable to do – completely reboot the company’s business model to position itself to win the next wave in tech.

In the case of Gates, it was the pivot from paid software to free advertising supported software (aka – the attention economy that we are now paying for).

In the case of Zuck, it will be the pivot from monetizing attention to monetizing the protocol. The good thing is he is headed in the right direction, and surrounded some of the smartest people I know in crypto. The bad news is when you have this anchor called a legacy business model, it means making the right moves and making them quickly a lot harder.

Here is an example of one of those choices Facebook will need to make and make correctly:

If @facebook’s stablecoin goes the private blockchain route it will be to #crypto what @Microsoft’s Internet Explorer was to the Internet.

— Chris Burniske (@cburniske) March 4, 2019

In any case, it is game on. Being on the verge of 60 years old means I have seen this game play out at least once before and so I have a frame of reference to observe it. That’s really great. It is an exciting time again in tech.

Categories: Blog articles

Golden Handcuffs

March 6, 2019 - 8:57am

Daniel Olshansky asked me this question on Twitter:

@fredwilson Have you ever written about how to avoid "rest and vest" culture where there are employees who want to leave a company but are held down by golden handcuffs?

— Daniel Olshansky (@olshansky) March 4, 2019

I don’t believe I have ever addressed this issue here on AVC but I certainly have seen it inside of our highly valued portfolio companies.

Here is the issue. Employees join a high growth company, are issued options which become valuable as the company’s equity appreciates, and if they leave they have to exercise the vested part (and pay taxes) and walk away from the unvested part. So they stay even though they may not be happy at work. Maybe they are not in a challenging role or maybe they find themselves in a problematic management situation. This leads to “resting and vesting.”

Here are some thoughts:

1/ A four year option grant is not a gift. It has to be earned via performance over time, not just time. If there is no performance, then the employee should understand the vesting is at risk. Companies should be very clear about this when they issue the options and on an ongoing basis. This is a cultural issue and needs to be treated as such.

2/ Companies need to have performance oriented cultures where there are frequent checkins between managers and team members, with feedback going both ways, and where non-performance results in changes. These changes could be restructuring of teams, changes in management, or departures of employees. Companies that do not actively manage performance are likely to have lower morale and toxic issues like resting and vesting.

3/ Managers and company leadership must do their part to take ownership of these issues. Employees will adapt to the environment they find themselves in. If you have a rest and vest culture in your company, look in the mirror to see the problem.

4/ I would like to see a market emerge for financing of option exercises. There are companies actively working on this. I believe that departing employees ought to be able to borrow against their valuable equity at no recourse to them, so that they can exercise and pay the taxes. This would solve part of the problem, where employees can’t leave because they can’t afford the taxes (and, in some cases, the exercise price).

5/ I do not believe that the option programs are the problem here. I do think the taxation at exercise is bad public policy and I wish the US government would move taxation to a liquidity event, but I also think we can use the capital markets to address this problem.

6/ I think in the vast majority of cases, the golden handcuff problem is a result of poor management and a leadership team that is unwilling to address this issue head on and make unpopular and difficult decisions about people.

So there you have it Daniel. That’s what I think about this issue. Thank you for asking me about it.

Categories: Blog articles

Being Wrong

March 5, 2019 - 10:48am

Howard has a great (and short!) post on how blogging publicly gives you a timeline on how you were thinking at a given time. He’s right, it is awesome to be able to go back and see what you were thinking and evaluate it in hindsight.

Like my “What Is Going To Happen In 2019” post.

Sitting here two months and a few days into 2019, I could not have been more wrong about the first couple predications I made in that post.

The stock market has been on fire and the President is still firmly in charge.

Of course all of that could change.

It is still early days in 2019.

But going back and re-reading that post is super helpful in reminding me that my assumptions may be wrong and I need to re-evaluate the assumptions to make sure I am heading in the right direction.

And blogging (aka taking a stand publicly) is a great way to do that.

Categories: Blog articles

Getting Credit

March 4, 2019 - 5:13pm

Last night CBS 60 Minutes aired a piece about the gender gap in tech and left out a number of important efforts to close the gap.

My friend Rob Underwood tweeted this out about that piece:

I admire work of my friend @hadip & the org he started, @codeorg. But the incredible, brave (!) @reshmasaujani is absolutely right. Having had a chance to work a bit w/ #CSForAll movement, @60Minutes leaving out contribs of @GirlsWhoCode, @NCWIT, @BlackGirlsCode is unconscionable https://t.co/hKwXLSkVXN

— Rob Underwood (@brooklynrob) March 4, 2019

And while I completely agree with Rob that Reshma has built something amazing at Girls Who Code, I also feel that the results she and her organization are getting are what matters the most and so I responded with this:

What I have learned from watching my wife (@thegothamgal) work on gender equity in startups and my own work on equity in CS education is that you cannot worry about who gets the credit, you have to worry about the results. It makes it easier to stay focused and stay happy

— Fred Wilson (@fredwilson) March 4, 2019

Later today, a friend and fantastic entrepreneur sent me a private email arguing that credit is very important and that it is how organizations gain credibility, legitimacy, and support to keep going.

Of course she is right. Credit is important.

I also got an email from the folks I work with at the NYC public school system pointing out that the NYC public school profiled in the 60 Minutes piece was the beneficiary of the CS4All effort which I have been championing for almost a decade now and that was left entirely out of the story.

All of this is unfortunate. There is a very broad coalition of organizations doing incredible work making sure that we have gender and racial equity in STEM education. And we are starting to see the results of all of the work of these groups. It would have been nice to credit a much broader group of organizations and companies.

But this happens all the time. USV has been the seed and largest investor and a highly engaged board member in companies that are referred to in the press as an “Andreessen Horowitz backed company” or a “Sequoia backed company” or a some other such characterization. When I see that I flinch a bit but tell myself that it is the company, the founders, and the results that matters and not who invested in it.

Success has a thousand mothers and some will get more credit than others. That is the unfortunate truth of success. But if we focus on the success versus the credit then I think we will all be better off.

Categories: Blog articles

Karma

March 3, 2019 - 8:13am

A friend of mine sent me this the other day.

Two AVC posts were at or near the top of Hacker News.

But I did not go and read the comments as I have found the comments at Hacker News emotionally challenging for me.

As many of you know, I have also found the comments here at AVC emotionally challenging for me.

One of the suggestions I received when I blogged about that recently was to charge for comments.

I don’t want to charge for commenting because I want this to be an equal opportunity place for people to speak.

However, when something is free, it is abused. We have spam and trolls.

One mechanism that I like is Karma. You are given Karma when you join a system, and you may earn more Karma every month to replenish your supply. You spend Karma to make a comment. And if your comment is popular, you can earn more Karma. If your comment is deemed to be spam or against the community rules, you lose Karma.

Creating a native currency inside a social system is powerful. It allows you to start “charging” for things that should have a cost associated with them while still allowing the system to be “free to use.”

I am not planning on adding Karma to the AVC comments because Disqus doesn’t support this feature and I’m not eager to make any changes to the technology I use to put this blog out every day. I mean that. So if you email me or leave a comment suggesting I move to a new comment system, I am going to ignore it.

But this idea, combined with the ability to spin up a crypto-token simply and easily, is pretty powerful. A number of social platforms are doing this. Reddit is one that seems to be making a version of this work.

If I was starting over from scratch, I’d build on top of that idea. I think it would make things a lot better.

Categories: Blog articles

Audio Of The Week: Chris, Joel, Jesse, and Denis on Crypto

March 2, 2019 - 7:49am

One of our first crypto investments maybe five years ago was Mediachain, founded by Denis Nazarov (@Iiterature), and Jesse Walden (@jessewldn). They sold that company to Spotify and eventually landed at A16Z crypto. One of the USV analysts who worked on our Mediachain investment was Joel Monegro (@jmonegro) who later teamed up with Chris Burniske (@cburniske) to start Placeholder, a crypto VC fund.

So we know these four people very well and all of them are now deeply involved in funding early stage crypto projects.

This podcast is a great conversation among the four of them on how to design cryptonetworks so that they function well over the long term.

Full disclosure: USV is an investor in Placeholder and my wife and I are individual investors in A16Z crypto.

Categories: Blog articles

An Open Letter To Jeff Bezos

March 1, 2019 - 7:37am

This ran as a full page ad in the New York Times today. I signed it along with the top labor leaders in NYC, the top political leaders in NYC, top business execs, and the leaders of NYC’s higher education institutions. I believe it was a mistake by Amazon to pull out of NYC and I very much hope they will reconsider.

Categories: Blog articles

Token Summit IV

February 28, 2019 - 8:24am

Chris Burniske reminded me yesterday of something I said a while ago:

"The lesson I’ve learned in my career is to invest into the post crash cycle. When you do that, and do it intelligently, you are rewarded greatly" – @fredwilson 4 years ago (in the last #crypto bear market): https://t.co/Fwy1J8ydRr

— Chris Burniske (@cburniske) February 27, 2019

We are in the post crash cycle in crypto and that has made the sector interesting to me again. Prices are way down and there is a lot of great work being done on projects we are invested in and projects we want to invest in.

And no better place to soak up all of that progress than at Token Summit IV, run by our friends William Mougayar and Nick Tomainoon May 16th in NYC.

When William asked me if I thought they should do it this year, I said “hell yes” but also suggested that they dial it back in line with crypto prices. And that is what they have done.

They are capping the number of attendees at 550, about the same number they had at the inaugural Token Summit in May 2017. They are planning to do it at an intimate venue and keep the content and attendee list very tight.

The first 200 early bird tickets are available for purchase immediately at a price of $699. After 200, anyone can sign up but they will be “invite only” and they are selecting signups based on quality, experience and diversity of thought they bring.

This year’s Token Summit will focus on the following issues:

  • Cryptonetworks and open source blockchain protocols versus startups: what are the differences and similarities?
  • Open finance: what are the challenges to getting open, global financial products in the hands of millions of users?
  • dApp development: can next-generation dApp platforms be a catalyst for greater adoption?
  • Latest practices in extracting blockchain data for insight: what can we learn and why is this important now?
  • Are we decentralized yet? Is there an optimal criteria for decentralization, and how do we get there?
  • How do we quantify the value of blockchain protocols, and applications?
  • What are the success factors in deploying decentralized protocols?
  • Decentralized governance – what is working now versus what is experimental?
  • Tokens evolution- what are the best cases with real innovation, real users and real benefits?
  • The regulatory front: Is the US losing its position as the standard bearer? Is there a perfect jurisdiction?


Categories: Blog articles

Carbon-Offset Shipping On Etsy

February 27, 2019 - 8:11am

I don’t write a lot about Etsy here at AVC. It is a public company and I am the Chairman so I have to be careful.

But today Etsy is announcing something that makes me so proud. I have to tell you about it. Etsy is the first major online shopping destination to offset 100% of carbon emissions from shipping.

Here is Etsy CEO Josh Silverman’s blog post on this news.

Etsy has been committed to clean energy for a long time. They will power 100% of their operations with renewable energy by next year. But the company understood that they could not stop there and needed to think about the carbon footprint of their network of sellers shipping products to buyers. And so they have taken the next step of offsetting all of the carbon emissions related to shipping on Etsy. This initiative comes at no additional cost to Etsy buyers or sellers.

To celebrate the launch of carbon offset shipping on Etsy, they are going to do something tomorrow to make a splash.

To jumpstart our efforts and celebrate this milestone, tomorrow (February 28), we will also offset shipping emissions for the entire US ecommerce sector for the day. In the US alone, every day approximately 55,000 metric tons of CO2e are emitted into the atmosphere by delivering packages from online orders. Offsetting this impact for one day is the equivalent of protecting 100 square miles of US forests for one year.

https://blog.etsy.com/news/2019/on-etsy-every-purchase-makes-a-positive-impact/

I am a believer in doing well by doing good. There is a lot of that across our portfolio at USV and across our personal investments in tech and real estate. One of the good things we need to do for our world right now is reduce our carbon footprint. And we need to do that urgently. So I am thrilled and proud of Etsy’s leadership and work here. Well done Etsy.

Categories: Blog articles

Progress Is Ugly

February 26, 2019 - 11:26am

I walked out of my house in LA this morning and was greeted with this sight:

I thought “ugh” and debated picking it up and putting it where it belongs.

I am all for progress and understand that there are costs and benefits with everything.

This post explains how electric scooters can and likely will result in massive reductions in carbon emissions (and that Steve Jobs was a big fan of electric scooters).

With that electricity subtracted, the net amount of mitigated carbon equals 17,130 metric tons. Let’s reduce this number by 20% for people who would have walked and for chargers picking up scooters in their cars. Now we’re looking at a total amount of 13,700 metric tons of CO2 mitigated by not driving a car.That’s the equivalent of taking 105,000 cars off the roads around the world, each day.

https://medium.com/cleantech-rising/the-environmental-impact-of-electric-scooters-8da806939a32

That is a big deal. It is really hard for me to be against electric scooters when I see people riding them to work instead of driving or being driven in cars.

But the way electric scooters have been rolled out here on the west side of LA leaves a lot to be desired. I have counted at least five suppliers of electric scooters in my neighborhood. There seems to be no limit on new entrants. And the big product market fit innovation that unlocked electric scooters, the dockless network (which I’ve been a fan of on this blog), is also the cause of much of the “ugliness” of them.

I have no doubt that the electric scooter providers will innovate on the model and the product and figure out how to alleviate many or possibly all of this ugliness over time. But until then we will be picking up scooters from our lawns and sidewalks.

It is no wonder that large swaths of society are getting tired of tech companies, startups, and disruption and are starting to say “no mas.” We in startup land have learned that the winners beg for forgiveness instead of ask for permission. And you won’t find a bigger fan of and promoter of permission-less innovation than me and my colleagues at USV.

If we wait for those in power to grant permission to innovate we won’t get anywhere. Most everyone understands that.

So we end up with ugliness. And that is a big challenge for innovators. Can we innovate a little more beautifully? I don’t know but I hope that we can try. If we don’t, we will see even more backlash than we are seeing now.

Categories: Blog articles

How To Be A Good Board Member

February 25, 2019 - 7:44am

Mark Suster wrote a post this weekend laying out some rules for being a good board member before the meeting, in the meeting, and outside of the meeting. It is a very good list. I particularly like his rules for outside of the board meeting and agree with him that is the most important part of being a board member.

I try to follow these rules except “let others speak.” That is a joke but I am known for taking up a lot of airtime in meetings, not only board meetings. It is something I’ve been working on for thirty-five years and something I expect I will be working on for the rest of my life. I just get so into it and can’t help myself.

Which leads me to my rule for being a good board member.

It comes down to one word.

Care.

If you care, really care, deeply care, like the way a parent cares for a child, you will be a good board member.

Of course, you have to do a lot of work; preparation work, people time, relationship work, reading, studying, etc to be good at this job.

But all that comes easy if you just deeply care about the company, the people running it, and everybody in and around it.

Categories: Blog articles

The “Doubling Model” For Fundraising

February 24, 2019 - 8:25am

I was talking to a friend this past week who is looking at an early stage company and trying to figure out how to value it.

He pointed to a similar company that has a public market cap of $250mm.

I asked him how many rounds of financing or how many major milestones does this early stage business need to accomplish before it can get to the same place the similar publicly traded company is at.

He said he thought it was going to take three big steps after this financing to get there.

So I said, “it is worth roughly $30mm after this round.”

He said “how did you determine that?”

I said “If you assume the value will double from round to round or milestone to milestone, and after three more of those it will be worth $250mm, then it should be worth $30mm after this one.”

I then said “work back from $250mm, to $125mm, to $62mm to $31mm.”

I call this the doubling model and I’ve used it as a framework for thinking about value appreciation in startup financing for over thirty years.

Here is a simple spreadsheet that shows how this works. It does not include the impact of employee equity grants in it so the numbers would change a bit if I added that. Assume the employees would own 20% of the company at exit.


This is just a framework, nothing more.

But I find it is very helpful in thinking about what is fair and reasonable at various stages of a companies development.

You can also scale this back. If a company only needs ~$20mm to get to positive cash flow, but only has $150mm of potential value at exit, you would get something like this:

The two big assumptions that drive this framework is that a company should always target to double valuation round to round and never dilute more than 20% per round. That minimizes dilution and also gives the existing investors the comfort and confidence that things are going roughly to plan.

If things are going great, you can take valuation up more than that from round to round, but in my experience that often catches up to you and the next round is flat as a result, which is not a great thing for anyone.

And everything is ultimately governed by the total size of the opportunity (TAM), how the market will value that at time of exit, and the capital requirements to get there. Those are the fundamental drivers of value in startup land and this framework attempts to respect them.

Categories: Blog articles