Startups More Valuable, or Just More Expensive?

Most analysis of recent data showing that startup valuations are up 16% year-over-year draw a dubious conclusion. They persist in saying that the companies are more valuable, as opposed to saying that they are more expensive. There is a difference folks.

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Comments

  1. Nigel deGruyther says:

    Common Paul, you were on the sell-side. You know that a company is worth the bid. In this case, the bid has increased by 16%.

  2. Paul K. says:

    Nope Nigel, not true. Venture capitalist markups are not the market, financial exits are, whether through trade sales or IPOS. Everything else is funny money: You can’t spend markup.

  3. Price vs. Value

    Thought-provoking post from Paul Kedrosky. I’ve been reading these numbers all day – certainly none of this is bad news but he hits the nail on the head. Another way of saying ‘never confuse brains for a bull market’ Infectious

  4. Price vs. Value

    Thought-provoking post from Paul Kedrosky. I’ve been reading these numbers all day – certainly none of this is bad news but he hits the nail on the head. Another way of saying ‘never confuse brains with a bull market’ Infectious

  5. Brent Buckner says:

    Value to whom? Startups are more valuable (to their pre-VC-funding owners) because they can charge VCs 16% more for the VC ownership stake. To the investee company it’s not funny money, and the company *can* spend the putative venture capital markup.

  6. Nigel deGruyther says:

    Paul, you are being silly if you think that the bid only counts in the stock market (an auction process).
    Everyday we see bidding. If a company buys a private company, they are making a bid. If a company buys part of a private company, they are making a bid.
    If an investment fund buys part of a private company, they are making a bid. A term sheet (the bid) is presented – it is accepted or rejected.
    If I go to a store to purchase something, I am bidding for it. If I do not raise my bid to the stores offering, I may walk away empty handed (or the manager/owner may lower their offer for me). But I can wait for a sale. In waiting for a sale, I am letting the store bring their offer down to my bid. In short, every free market is an auction, and by extension, the value of the item is the bid.
    Or are you saying that venture investing is not a free market?

  7. Paul K. says:

    Cmon Nigel, if I didn’t know better I’d say you’re wilfully missing my point.
    A bunch of VCs bidding up early-stage venture investments in the absence of a liquid exit market is most meaningfully thought of as said companies becoming more expensive. The compression between “the bid” (in your words) and the likely eventual exit price is the interesting thing to an LP, not that early-stage companies are somehow “more valuable”. It comes down to a choice of words, with one choice being useful and the other being silly.
    And it’s a different point, but if you really think that venture investing is truly an open market — one with price transparency, frequent price-setting, free flow of information, and bidding on all securities — then you need to spend a little more time around the venture business.
    P.

  8. Nigel deGruyther says:

    OK Paul, to some extent I am willfully missing the point. But I also think you are missing something here. And, for the record, I do have experience in VC (I’m sure you have googled me by now and know that).
    We know that in a free market, the market clearing price is the intersection of the demand and supply curves. The market clearing price is set at the margins; if more capital is available, or fewer investing opportunities are available, the market clearing price of start up companies will increase. Is that not the simplest explanation for what is going on – a shift in the abundance of one of the two commodities in question, resulting in a shift in the amrket clearing price? And if that is true, then the value function has, in fact, changed.
    The increase in the value of start ups does not indicate that start ups are more expensive, only that the relative availability of capital and consumers of capital have changed.
    With a bit of research I think you will find that the returns on venture capital are cyclical, high returns attract more capital that reduces the productivity of the capital, resulting in a flow of funds out of VC and the cycle restarts.