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Notes -
There's an economics paper to be written about this.
Start up valuations are mostly a game until they're not. Signaling is a big part of it. If I'm raising at any stage (pre-seed, seed, series A, B, C etc.) I have to look around at the other companies who are raising at the same time, I have to figure out what VC firms are expecting over the next several years, I have to look at the IPO markets. That is how I create my own valuation, not my internal metrics (cashflow, margin, customer churn etc. etc.) The game of it is building a narrative that takes your internal metrics and creates a direct path to the du jour valuations.
If I don't do that and ask for less money, I am inadvertently signalling that I am not as high growth as the other companies I'm competing with. If I do that, no one will invest in me. Sure, you're going to say "but a real value investor---" No, that's not how big time VC works. Now, there are under the radar investors (I hesitate to call them VCs because they're too smart for that label) who purposefully try to find companies at good prices and don't care about the competitive pricing environment. But, the VC world being highly relationship and network driven, it's not like any company can flee to these "smart" investors. If you don't know them already, you don't knew they even exist.
So, most companies, especially those with first time founders, are playing the Big VC game. Investors will quite literally tell you "You have to take 5 million, even though you only asked for 3 million. If you don't, we're walking away. Also, make sure you spend all of that - we can't have a bunch of extra cash."
Why tho?
Because the VCs themselves have to make their fund performance metrics work; their IRR, their Multiples. A funny thing developed over the past two decades, however. This article is legendary for explaining it; deploying capital really fast creates its own outperformance even up to billions of dollars. So, if I am a VC with no particular investing talent but a lot of money (which is most of them) I want to find as many companies as I can (the later the stage the better, up to about Series C) and just cram huge amounts of money into their face. Because it works.
Even if it doesn't make any sense.
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