Architecting valuations (building a house of cards)

In a day and age of valuations as  score card there are in some cases extraordinary efforts being made to forcefully make certain milestone valuations happen (100m, 500m, 1bn etc).

The right way to make a high(er) valuation happen is of course to have someone just pay that price with fair and appropriate growth / later stage financing terms. Lots of companies can pull that off – even to the point where new later stage investors are just getting common stock.

But that is not what is going on in many cases. This is what’s going on:

New later stage investor: “Hey so I don’t think your company is worth $500m; maybe $200m – BUT if we can agree that I can get a 2x liquidation preference on my $50m and a full ratchet I would be ok with it. You should be fine with it because you told me next round will be $1bn+  – so we both win. You get your $500m valuation now, you don’t get a lot of dilution and I know I’ll make a safe 2-3x.”

Basically this means the new later stage investor will still make a 2x return if the company is sold as low as for $100m (!). And

Careful what you wish for – setting precedents as an early investor

I suppose this about short term greedy vs long term greedy.

It is short term greedy to put onerous terms on to an early stage company just because you can. This is not about finding (or adjusting to) the right price – this is about unreasonable participating liquidation preferences (multiples thereof), too high a dilution from the get go (30%+ seed rounds etc) instead of adjusting the round size, taking key rights away from the entrepreneur or angel investors, etc. There’s a large torture tool kit folks can use if they want to.

It is long term greedy not to do that because of the compounding returns on reputation for being a fair and good to work with investor (get in to the better deals long run) + the added bonus of not screwing up the company as an investor.

But there’s another, slightly more selfish, reason you may want to ease off the torture tools as an early investor: it’s because they may be used against you come next round.

So say you negotiated a 2x participating liquidation preference (not pari passu) for the Series A – the folks leading the Series B may want that too. And if you invested

Giving and taking as an investor

The ultimate act of giving as an investor is of course when you wire money. Hopefully you give a lot more over time by helping the entrepreneur a long the way.

But as an investor you also do a lot of taking. It starts with shares. But it goes on with reporting requirements, board meetings (although they should be giving opportunities), info requests, LP conference attendance for CEOs, the (hopefully only) occasional wrong opinion / advice, etc. It can be a long list.

Nearly everything in life and business is about giving and taking. But every now and then as an investor you need to step back and check whether you are giving or taking more. And if you ain’t doing a lot of giving, you may want to slow down on the taking part too.

I think net-giving is the best long-term strategy for investors.

Entrepreneurship is the new normal in Europe

A few weeks ago the folks at the factory put together a great pop-up (as you do these days) tech conference called Startup Europe Conference. Lots of people came from all over Europe – an ecosystem of increasingly connected dots.

What stuck with me though was something Christophe Maire said in passing. He probably didn’t think much of it; I’ve been thinking about it a lot since then. He said, “you know, entrepreneurship is now the new normal in Europe.”

Christophe is right; something has changed over the last 1-2 years and we didn’t notice it. Thinking about it, the attitude has developed like this over the years:

  • Wow we’re a [Berlin / Stockholm / London / etc] startup
  • Wow we’re a startup
  • Wow we’re solving this really big problem

And politicians, media, non-tech folks have started admiring their local scenes and celebrating them. It’s not a freak show any longer.

Don’t get me wrong – there is so much left to do; but I like this new normal.

The panel at the conference was a few weeks back and I’m not even sure what we were talking about. But I do know it was called “50 Shades of Green” and was fun:

Europe, it’s time to kick off the blockchain revolution

Even in the tech community there are a few people left that think that the blockchain is something you lock your bike with (and oddly enough, they would be right if you assumed a connected smart-lock that uses the blockchain!).

Don’t get me wrong – there are some great teams out there across Europe building blockchain apps / services and investors willing to back these folks real early. But there should be 10x more on both sides.

Right now I am thinking how we can help more to get this thing started in Europe. We are putting our money where are mouth is and have backed our first team recently (enabling market places on the blockchain) and I hope we do a lot more soon. I’m encouraging every first time entrepreneur to look at the blockchain closely. I have the same conversation with entrepreneurs in between companies. I’m thinking how our existing companies can embrace the blockchain. I need to do more.

The media needs to shed more light on this – we need to talk to them. Our politicians should embrace the blockchain for government services; create a competitive environment regarding the ability to use blockchain within the legal system etc. We need to