An investor passed on a fund that paid 30-40x revenue for startups, believing quality alone justifies price. Three years later, that fund and its predecessors are underwater. This illustrates that even for great companies, undisciplined entry valuations and the assumption of multiple expansion can lead to poor returns.
Related Insights
Cisco's stock took 25 years to reclaim its year-2000 peak, despite the underlying business growing significantly. This serves as a stark reminder that even a successful, growing company can deliver zero returns for decades if an investor buys in at an extremely high, bubble-era valuation.
A long bull market can produce a generation of venture capitalists who have never experienced a downturn. This lack of cyclical perspective leads to flawed investment heuristics, such as ignoring valuation discipline, which are then painfully corrected when the market inevitably turns.
During hype cycles, massive venture funding allows startups to offer products below cost to capture market share. If the company fails to achieve a high-value exit, the Limited Partner's capital has effectively been transferred to consumers in the form of discounts, without generating a financial return for the investors.
A common mistake in venture capital is investing too early based on founder pedigree or gut feel, which is akin to 'shooting in the dark'. A more disciplined private equity approach waits for companies to establish repeatable, business-driven key performance metrics before committing capital, reducing portfolio variance.
Valuations don't jump dramatically; they 'sneak up on you.' An investor might balk at a $45M cap when they expected $40M. But the fear of missing a potential unicorn is stronger than the desire for a slightly better price, causing a gradual, batch-over-batch inflation of valuation norms.
The standard VC heuristic—that each investment must potentially return the entire fund—is strained by hyper-valuations. For a company raising at ~$200M, a typical fund needs a 60x return, meaning a $12 billion exit is the minimum for the investment to be a success, not a grand slam.
Seed funds that primarily act as a supply chain for Series A investors—optimizing for quick markups rather than fundamental value—are failing. This 'factory model' pushes them into the hyper-competitive 'white hot center' of the market, where deals are priced to perfection and outlier returns are rare.
In the current AI hype cycle, a common mistake is valuing startups as if they've already achieved massive growth, rather than basing valuation on actual, demonstrated traction. This "paying ahead of growth" leads to inflated valuations and high risk, a lesson from previous tech booms and busts.
The founder advises against always pursuing the highest valuation, noting it can lead to immense pressure and difficulties in subsequent rounds if the market normalizes. Prioritizing investor chemistry and a fair, responsible valuation is a more sustainable long-term strategy.
