Valuations have been rising for all kinds of venture rounds for years. The rise has been most severe in B rounds and after, as today's unicorn frenzy begins to take hold. Even earlier, both A and Seed stage valuations have doubled since 2006. At Social Starts, we are proud that our method for moment-of-inception investing has bucked this trend. Since 2013, our median first investment valuation has actually dropped. For the first half of 2015, it is $3M, half the current market norm.
Source: PitchBook
We are particularly proud of this trend because we feel these lower valuations have come from some of the greatest companies we have had the opportunity to support.
We are achieving price efficiency largely because we are working hard to find great companies earlier in their lives. If we can, literally, be the first investor to ever call a founder, if we can help that founder build the company from those earliest moments, we can achieve a lower valuation for the right reason: not for being chintzy, but for being helpful.
Another factor in keeping our valuations down is our firm belief, which we can often help entrepreneurs to recognize, that higher prices don't always equate to better outcomes for founders. In fact, often it is quite the opposite.
Imagine the over-stimulated young founder pushed by pals, accelerators, press reports and other "helpful" sources to price his or her we-just-got-here start-up at $10M on Day One. That's an ego echo, not a practical decision. First, the too-high price will likely, at minimum, extend how long it takes to get the round done. Secondly, those willing to buy at the high price may not be the experienced, practical investors who could most help the company get off to a great start. And, even if the entrepreneur managed to close on this valuation, it puts unnecessary pressure on the leader and team to live up to unrealistic expectations. That generates stress which actually diminishes the chances for great performance; excellence most often comes when the team feels comfortable and confident.
Even worse is the situation, all too common, when things don't go exactly right, pivots are required and reaching success will take longer than anticipated. Now, that founder has to get additional capital under tough circumstances. But that price is too high! The next raise has to be a down round or a lower cap. Early investors are unhappy. Option pools get squeezed. The new money may come with tough-love terms. It can be torture for a team. It can be the moment the company loses focuses and falls off the direct path to success.
If that $10M had been $5M or $3M, the larger pool of interested investors would give the founder more choice. Money needed later but before the Series A could be found at even a slight mark-up, so progress keeps going. It is in numerous ways a better situation for the entrepreneur to not over amp the price early on.
Our biggest investment successes have had the most modest first-money valuations. Those founders didn't get caught up in ego. They didn't view money raising as a contest, where the winner is whoever raises most. They were practical and measured and wanted great help as much as money at their origins.
That is something we look for in founders. And, happily, as the results indicate, increasingly we are finding it.