On 2021 startup valuations

Some folks in our angel investing club (thesyndicate.com) have asked me for my thoughts on the surge in early-stage valuations.

The market is scorching hot, with startups across all growth stages getting funded faster and at higher valuations. 

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The dollar amounts raised are often staggering, but so are the exits — which are driving this.

When there is a large number of meaningful exits — from Uber to Airbnb to Coinbase — investors get enthusiastic about investing in the next wave of unicorns.

This causes valuations to quickly double and triple, with investors reporting, “the valuation doesn’t matter if this becomes the next unicorn!”

Of course, it does matter since most companies go to zero, and you can invest in three startups at a $10m valuation for the same price you would pay for one at $30m. 

Three swings at bat dramatically increases your chances of hitting an outlier.

Now, if you could invest in Uber or Airbnb’s angel round, Series A, or Series B, you would certainly do it, but there is no way to know which startup is the next Uber or Airbnb (at least not with certainty). 

Our firm and investment club are adjusting to this moment to focus on four things:

  1. We are investing in high-quality startups at reasonable prices, as we have always done. 
  2. We are investing in select, very high-quality startups at these higher valuations. 
  3. We are helping existing portfolio companies raise money during this frothy market.
  4. We are meeting with as many startups as possible and noting when we pass because of the valuation so that we can meet with them again in the future. Many times a startup will “catch up” to a high valuation, and the next round will allow us to engage at a more defensible valuation. 

We invested in Calm, Uber, and Thumbtack for ~$15m — combined. 

While the $5m Seed round may be over for now, we have seen several pre-launch startups command $15m to $50m valuations. If those startups are led by a serial founder, it’s justifiable, but most of the time, they are first-time founders. 

We are content to sit out these Seed rounds and wait to see if the startup gets to product-market fit. If a pre-launch startup raises at a $50m valuation, for example, and then gets product-market fit and hits $1m in yearly revenue, the valuation is likely to be $10-25m in a normal market. 

This “filling in the valuation” strategy is acceptable for founders who have discipline, but it does carry the obvious risks of a down round if they don’t. Most founders seem to understand this, with many telling me, “I know this valuation is crazy, but we are taking advantage of this moment.” I would do the same if I were them, so no judgments — just make sure that you have the runway to fill in that valuation. 

For investors, you don’t have to hit every winner to be a big winner. In fact, you only need to hit one. 

In a hot market like today’s, we encourage members of our investment club to evaluate their goals, pace themselves, consider making adjustments to their strategy, and always remain disciplined — by focusing on great founders, quality products, and delighted customers.

Great founders.

Quality products. 

Delighted customers. 

Those things don’t happen by accident. 

Best, Jason
PS – Join us next week for Meet Our Fund, where 25 venture funds are pitching thousands of founders https://live.inside.com/meet-our-fund-j

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