Two patterns I’m seeing both pointing to some unrealistic expectations in startup valuations in the Bitcoin and Blockchain segments.
1/ High seed valuations, with incomplete teams and products, based on speculative future value
2/ Large Series A or B rounds that are swinging for the fences, without a strong foundation
This isn’t based on historical data, but it is based on what I’m seeing right now. The numbers will show this in a few months.
In real estate, there’s an accepted convention that your house is worth exactly what the buyer is willing to offer. In the venture capital space, some entrepreneurs are thinking the same way, i.e. as long as investors are willing to pay a price, then why not.
The difference is that a house is a physical piece of collateral, and that includes the land value that it sits on. But a startup’s valuation is based on some assumptions of growth that are either real or speculative. It’s OK if the startup gets valued a little ahead of its real market valuation, as long as its traction keeps moving in the right direction, and it will eventually justify that valuation and often exceed it in the next round. However, if the startup doesn’t move forward, down rounds, layoffs and other bad effects start to happen.
Some startups are raising more money because they see the train as passing once. I’ve even heard some raises shooting for a 4 year runway.
Out goes the orderly convention of raising for 12-18 months, showing results and progress, then raising more as needed. Non VCs (code named “Strategics”) are entering the game, and they have no track record in venture capital, nor understand investing in tech startups the way a VC does. So, they treat these investments as one shot deals, like a bet, and offer money and promises of partnerships or product usage, but no one knows if they will be there for future rounds.
A disciplined investor with a track record will not typically go into a deal that is not priced right. They will walk away and think there’s always another deal around the corner.
Higher Series A (and some B) are happening, because some investors are fearing they are missing out on blockchain investments. But the landscape is still forming, so it is very difficult to accurately spot the winning horses, because even the rules of the race are in flux. Raising a large Series A when there is not yet a clear path to traction, nor a well-defined product is risky, and you may be setting-up the startup for failure from greater heights.
What matters in pricing a seed round is your current position. It is your starting point. What have you done so far in order to justify the valuation being asked?
It’s better to ground yourself in today’s reality, and not in future euphoria.
I like to refer to this Valuation Data tool from AngelList that aggregates average valuations, and lets you filter the data by location, market and other parameters. It shows an average valuation of $4.1M for early deals.
Just because a space is hot (e.g. blockchain) doesn’t mean that your starting valuation should be higher, unless there are other valid reasons. If you haven’t built an MVP or team yet, your early risk is the same, whether the market is big, small, hot or not.
Yes, the blockchain is an amazing piece of technology that represents a unique and rare transformation opportunity, and the market is potentially huge, but it is not any different than the Internet’s advent in 1994. It needs to gradually grow and infiltrate the various nooks and crannies it can fill. Rushing its development will not necessarily rush its deployment.
I’ve already issued my first warning, six months ago in February 2015, The Bitcoin Startup Ecosystem is Frail: Beware of the Next Crash, and Fred Wilson added by reminding us that The Carlota Perez Framework might apply here, i.e. we will overshoot into the installation phase, before smooth sailing into a prosperous deployment phase.
Speed kills. Some entrepreneurs are getting greedy. Some investors are becoming fearful. Greed, fear and speed are not a good combination.