I just penned “what’s up with the crazy valuations?” after reading about Scribd’s $17.5M round. I dug deeper and came across Michael “the bubble” Arrington (that’s a compliment, like Henry “the Bull” Blodget):
The rumored valuation of more than $10 million is very high, although the current trend is for entrepreneurs to take big money when it’s offered.
I’m not sure that’s wise. I think most entrepreneurs are smart, but they don’t know much about finance. They trust advisors and what not, oftentimes folks who are really nice… at making money for themselves.
Anyway, the problem with super high valuations is that within weeks, months, or a year or two the entrepreneur can get a really good buyout valuation but it might not be enough for the investor.
Imagine in this case getting a buyout of $25M for Scribd. I have no freaking clue what Scribd is and I don’t really think “YouTube for documents” makes a lot of sense as a business model (I swear that is a shortcoming of my 2 digit IQ and does not speak about the value of the business).
But the problem is that at $25M the founders are jumping up and down, running around naked but the investors who invested at the $17.5M valuation will block the deal.
I know what you’re thinking: the Scribd guys were really smart and gave no such right to the VCs. Right. Sure.
READ THE FINE PRINT. They probably did.
They probably would have fared better giving the VC a $10M valuation (for example) in which case the $25M buyout represents a 2.5 times return in a short time.
I know what you’re thinking: why sell early if the high valuation will allow Scribd to really build value over time. That’s what eBay did when it rose $5M on a $25M valuation. That’s why / how Pierre Omidyar is worth $10B. But, Scribd is no eBay!
Is it?
Digg this Blog
Share on Facebook
WatchMojo on Twitter
WatchMojo on YouTube
Add to Favorites
WatchMojo Newsletter
