Old post by Chris Dixon but, heck, I just saw it. If it's new to me, it's bound to be new to someone else. Quote:
Suppose there is a pre-profitable company that is raising venture financing. Simple, classical economic models would predict that although there might be multiple VCs interested in investing, at the end of the financing process the valuation will rise to the clearing price where the demand for the company’s stock equals the supply (amount being issued).
In practice, the equilibrium states for venture financings are: 1) significantly oversubscribed at too low a valuation, or 2) significantly undersubscribed at too high a valuation. ...
When you invest in early-stage companies you are forced to rely on very little information. Maybe you’ve used the product and spent a dozen hours with management, but that’s often about it. The signals from other investors who have access to information you don’t is an extremely valuable input.
So what should the smart entrepreneur do? They should read The Importance of Investor Signaling in Venture Pricing including the comments that follow the post, separate the wheat from the chaff, and then turn theory into practice.
Really interesting piece of article (new to me as well!). Just a question - while I agree that going with a big VC name has its share of risks, but doesn't a big name give credibility to the start-up and in fact, might help it gain more business quickly?
Posted by: Account Deleted | Nov 22, 2011 at 12:52 AM
Yes, there are pluses and minuses. Just have to weigh them. The amount invested matters too. I think Chris Dixon's post was partly prompted by the trend of big VCs investing a few hundred thousand dollars in seed or very early-stage firms as a call option on future rounds. In that situation, I'd say the disadvantages of a large VC over other investors outweigh the advantages... assuming other investors are available.
Posted by: Murli Ravi | Nov 22, 2011 at 02:37 PM
I guess that explains the reason behind his venture Founder Collective. Would be really great if something similar exists for just Indian ventures as well. Another interesting article http://vator.tv/n/21b5
Posted by: Account Deleted | Nov 23, 2011 at 03:20 AM