Everyone knows that valuations for early-stage technology start-ups have been increasing over the last few years. Basically what has happened in the US is happening in Latin America. Of course a big cause is the fact that money is yielding 0% at banks, so it is going to other assets classes such as real estate, private equity, and venture capital. But on top of that root cause, there is also a revival to everything related to technology and entrepreneurship much like what happened in the late 90’s.
The other side of the coin of pricey entry valuations is of course exit valuations. If they are high enough to justify the risks of entering at high valuations, everybody is happy. The problem is that from what I am seeing right know in Latin America the exit valuations are not looking very good. I am seeing on almost every country, and while there are a few outliers, the average exit is not very encouraging for VC investing in the region.
Everyone likes to think they can sell their Latin American start-up for at least $10 million, but it is not that easy. And when seed and Series A investors accept valuations in the range of $1-5 million, the return starts to get crappy for VC standards. To add insult to injury, the exits I am seeing are usually a low amount in cash, and the rest in equity (of another private and illiquid company usually) or earn outs (where the investor has no control on the results). Different is the picture for entrepreneurs, which can make a few bucks despite the fact the exit is not so glamorous and also negotiate a good compensation package with the acquirer.
So what do we do? Well, not much. If you are an investor, take into account that agreeing on valuations above $2 million will put you on a dangerous place from a return standpoint. You can find good deals below that valuation? Maybe you need to wait until the market corrects. It always corrects, trust me. If you are an entrepreneur, enjoy the bubble while it lasts. My only word of advice is that if you raise money at a high valuation and the exit is not a good one, chances are that you will need to find new investors (or yourself) for your next venture. As any relationship in life, it should be win-win. And it is not happening like that.
Great, great post. Tweeting because I am seeing more and more people talking about stocks, valuations, trading and “oh my God it is so cheap” that I can resist. Dudes, if you are not pro’s on stock trading and asset management, get out of it. Leave it to the indexed funds, or pro asset managers. You are better off. Changes of you making a lot of money by stock picking are less than starting your own business and focusing on what you do best. So do the latter :)
This post is a more thought out version of my response to friends asking what stocks they should buy. The short answer is: none. Unless you have a sophisticated investment strategy (in which case you aren’t turning to me for advice) you should invest the bulk of your funds in low-cost index funds.
This statement is neither profound nor new, yet lots of smart people I know trade at least occasionally. To begin, let’s define the criteria under which this behavior is sensible:
Stock picking only makes sense if we expect to consistently outperform the market averages (approximated by broad index funds). Not only do we have to beat the average, we must do it by a wide enough margin to cover higher trading costs along with the opportunity cost of our time. In other words, the answer to “do we believe that our stock selection ability is significantly above average?” has to be a resounding, objectively justified “yes.”
via Ed Markovich: Why I don’t trade stocks and (probably) neither should you..
Not sure if it applies to every region of the world. My sense is that is applies globally. There is only one SV. What I am extremely sure is that it applies to Latin America: never in your wildest dreams imagine this can be replicated, never :)
Tech pundits love to place bets on where the “next Silicon Valley” might be. But to make a decent wager, first you have to consider the origins of the original. Given that life is chaotic and chance always plays a big role, I don’t think one can identify a sufficient cause for Silicon Valley. But I can cautiously discuss four necessary factors that might make another fount of innovation possible.
via The origins of Silicon Valley: Could they ever be replicated?.
Oh my god… Good luck developers :)
Great post from Ben Horovitz, and I love the retro quote from Jackson regarding Dennis “the Worm” Rodman (a classic smart bad employee):
Phil Jackson, the basketball coach who has won the most NBA championships, was once asked about his famously flakey superstar Dennis Rodman: “Since Dennis Rodman is allowed to miss practice, does this mean other star players like Michael Jordan and Scottie Pippen can miss practice too?” Jackson replied:
“Of course not. There is only room for one Dennis Rodman on this team. In fact, you really can only have a very few Dennis Rodmans in society as a whole; otherwise, we would degenerate into anarchy.”
via When Smart People Are Bad Employees — This Happened to Me — Medium.
Great blog post that builds on an original Hacker News post of an entrepreneur that failed miserably. All great points about starting a business, the statistics, how luck always help and some more stuff. Don’t read it if you are having a low week at your venture :)
Being smart and hard-working got me to seven employees. Luck took me the rest of the way.
If you read interviews with successful entrepreneurs, some will tell you that having the right people is the most important part. Others will say that a carefully planned strategy is key. Or core values. Or passion. Or the right investors. Or failing fast and pivoting. Or a commitment to doing something great. Why so many opinions? I suspect that few people appreciate the role that luck played in their success.
via Don’t Start a Company, Kid » Big Nerd Ranch Blog.
Good advice and good spreadsheets to do your own pre-Series A cap table.
A clean cap-table will make your company more attractive to VC investment. If you only have two different forms of equity (founders’ common stock and Seed Preferred), any future investor can very quickly conclude their payout in an exit. However, if there are multiple series of equity (and therefore multiple liquidity preferences, sets of voting rights, information rights, etc), that calculation becomes a whole lot messier and could be the difference between a 7-digit investment and a VC passing on you.
via How to make a cap table for pre series A companies.