Somehow*, I came across Paul Lee’s post on high valuations, he’s a founding member and Senior Vice President at the Peacock Equity Fund, a joint venture between NBC Universal and GE Capital:
A high valuation is problematic for a number of reasons. The first, and probably most important, is the impact on the company’s ability to attract quality talent. That’s not to say that you couldn’t (I’m sure the aforementioned microblogging site is seeing a flood of resumes). However, most people in the startup world join startups for the equity upside in a liquidity event or IPO (although the garage sale furniture and stale pizza at 1 a.m. is tremendously appealing). When a highly priced round is completed, guess what–the strike price of the options also go up. In effect, the hurdle for the options to be “in the money” has gone up and the value of the options has decreased. The motivation for the employees coming in after the financing has been materially altered.
Another difficulty in raising a highly priced round is the set of expectations from the new investors. Given the high valuations, the milestones that you’d have to hit to justify the valuation are usually aggressive. The difficulty in setting such aggressive milestones is that if you only complete 50%, you’ve basically built a bridge to nowhere. When you next need to raise capital, you may be faced with a down round, or in extreme circumstances, a complete recap or non-funding. Lawsuits and tensions around the board about fiduciary responsibilities are common. Not very fun stuff.
It sort of reminds me of a quote from a low-profile entrepreneur named Bill Gates who started a software company in Seattle back in the day. He quit to run a non-profit to help end poverty:
One challenge Microsoft did face, and that Netscape now faces, is coping with a high market valuation. Netscape has little income, but investors have valued its stock at more than $2 billion. When a company’s shares have a high value, expectations from investors, including employee-owners, are correspondingly high. Failure to meet those expectations can be damaging. If you’re giving share options to employees so that they can participate financially in the expected success of a company, a high valuation hurts. If the market’s already anticipated the great work those people are going to do, then their stock options won’t appreciate much in value, if at all. This can make the options worthless. Many times in the past I have felt that Microsoft stock was higher in value than it should be. Subsequently I was proven, in a sense, to be wrong. Controlling expectations—whether about deliveries, product features or stock value—is often wise in a technology business. It’s a lot better to under-promise and over-deliver.
Read more about that here.
[* A lie. You will see why and how I was on Fast Company in a few days when I post the Fast Company article that mentions WatchMojo.]
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WatchMojo NewsletterWhat is wrong with MSFT?
Despite the fact that their sites (MSN.com and I guess MSNBC.com as well) garner the highest time spent on site of any company, they cannot convert those eyeballs and engagement into profits?
Then again, maybe it’s specifically the reason why their operations are burning so much money?
The best line about the whole Skype saga has been that “everyone who has ever done a deal with the Skype guys has walked away unhappy.” I think it came from Tech Crunch.
Now, Index Ventures and alleged slime ball Mike Volpi are out, and in their place comes the original dashing duo.
Read more. But I wonder, how long before Volpi leaves Index to “spend more time with his family?”
And seriously, what is wrong with a VC like Index to begin with?
Pretty amazing to see Michael Arrington evolve over the years. This past week he penned a post that basically took down a few questionable people and practices. Today we see this gem of a video:
Crazy to see what VCs back. No comment.
