Valuation: what price should you go out with

I got a question this morning about getting an external, "objective" valuation with which to go out and raise financing. Here's my typical answer to that:

Early-stage valuations are straightforward to understand. But they have little to do with traditional valuations.

In normal valuation work, enterprise value is the expected value of future cash flows. For early-stage companies, the variance in those cash flows is very high. It's not a meaningful analysis if there's a good chance of your cash flows being zero or you being the next Facebook.

Early-stage valuations are a confluence of many different factors. You can only control some of them. Most important to understand is that a valuation is a market price. It's a price for a very specific asset - shares in your company - at a very specific moment. It's not what your company is "worth" or even what you could sell it for. Those are different market prices.

The way to maximize the market price of a venture financing is to be smart about the negotiations. That's why I tell all founders to never, ever talk about the valuation upfront. For one, it anchors you. If you set too high a valuation, people will walk away. If you set too low a valuation, it will create a ceiling. Bad news, either way.

The right thing to do is figure out the money you need to get to the next value inflection point. Build a model that shows the use of funds and how the investment makes you a much more valuable company. That should be the smallest amount you're looking to raise (plus a buffer). Divide that amount by the highest dilution you'd find acceptable. Now you have the minimum valuation you are looking for.

Figure out a timeline that means you'll get a few offers more or less at the same time. Then you start talking VCs. Stall or rush as necessary to get people onto the same timeline. You want termsheets submitted within days of each other. A sense of competition and urgency can help, but too obvious an auction process will turn people off.

When investors ask you for valuation expectations or "guidance" in meetings, don't answer that. Stress that you're looking for a long-term partner (you should mean it). Tell them your last valuation (if any) and all the progress you've made since. Paint the picture of the upside again. Don't give them a price - offering you a deal is _their_ job.

Once you have several offers, you've created your market. There are lots of unique things about the bidders. You may like one of them more than the others. But now you have liquidity. You can go back to the lower ones, if you like them better, and ask them to increase their bid to match others. Rinse, repeat a few times.

Using this process, many of our founders raise more money and at higher valuations than expected. The dilution (what VCs will own in your company) is often less flexible than the amount raised. A higher amount raised will generally mean a higher valuation.

There are lots of posts out there about valuation not being the most important factor in a financing. That's true, but it's also true that you owe it to yourself to optimize price as one factor of a financing. The process above is the way to do that.

Signals.vc

We've had a few new funds emerge in Berlin over the last few years. But I'm particularly excited about Signals.vc, run by Videesha Böckle. Videesha was previously at Redstone and before that at PROFounders, our co-investors in Berlin-based GetYourGuide

Signals is investing in European SME- and enterprise-focused companies at seed and Series A, in particular in frontier tech (AI, Blockchain, IoT). It's a segment that doesn't have a lot of dedicated investors and yet it's one that requires a lot of expertise to make conviction-led investment decisions. It's a €100M first time fund, which is also a great result.

Go talk to Videesha if you're doing something enterprisey. 


Fight the forces of endless distraction: turn off, tune out

It took just a decade and a half. 15 years to go from the hopeful, curious, rebellious days of the post-crash internet for the misuse of this tool to start ripping apart the social fabric, the basis of our way of life, to start gnawing at the core of what it means to be human. There are days it makes me a bit Ted Kaczinsky (sans bombs).

Our world is tumbling from obsession to obsession, from anxiety to anxiety. Look around you and no matter where they are, people are glued to their devices. Looking for that next feeble dopamine hit of pretend social connectedness. That brief elation in status from a Like or a new follower. Only to come home to lose themselves in the beautifully made, well-told but ultimately moral-free Netflix-original Marvel-adapted hogwash of sentimentality. Hook, peril, hero’s journey, MacGuffin, 5 seconds until another episode starts, skip trailer.

Everyone is distracted. It’s so constant, we don’t even notice anymore. I loved Roger McNamee’s essay earlier this year. And the news that former FB employees are coming together over the issue is encouraging. But on an individual level, don’t wait for people to educate and regulate. 

Resistance now looks like this: turn off, tune out (sorry Tim Leary). The world as it presents itself today is an incredible opportunity for those of us with the discipline for focus. Who realize that the algorithms are running us. And who think that we might want to walk upright, straight-backed, knowing-eyed into the inevitable merge of human and machine.

We recently backed a stealthy company in Berlin as one answer to this challenge. I’d love to see more - max@sunstone.eu. 

Narrowing my focus

I joined Sunstone five years ago this coming April. Half of the investments I’ve made are companies selling to consumers; the other, to businesses. 

For a long time I resisted narrowing my investment focus. The whole point of being a VC instead of a founder, I argued, was to retain the optionality of being able to do both. 

No longer. From 2018 onwards I’ll focus on consumer investments. It’s a combination of the market having grown to the point of where I can’t cover it all. But also that I don’t enjoy (and am not world-class at) selling to the enterprise. 

Consumer, for me, includes eg personal productivity software bought with a credit card. But it excludes all enterprise software, like databases or cybersecurity. It includes B2B2C-type marketplaces, which aggregate merchants selling to consumers. But it excludes eg all adtech that only touches the consumer for data. 

My favorite consumer investments are marketplaces/platforms/networks and DTC brands. I love travel. I’m spending a lot of time on crypto. And I think social is far from done. 

I realize all this is a bit contrarian. Most VCs I know have pivoted to enterprise. Many are focusing on “deep tech.” 

I’ll continue screening these types of investments for my partners at Sunstone and am always happy to intro them. But as for me, I’m 100% consumer now. 

No fear, no greed

Last year I tried a little thought experiment in our partnership. I asked: What would a venture firm look like that removed all fear and greed from its internal discussions and external interactions with entrepreneurs? What if every challenge was construed as an opportunity? What if every time a company went through hard times or “failed”, we’d see it as an invaluable, even indispensable step to become a better organization, a better partner, a better person? 

We aren’t all the way there. But the discussion was very useful. Not least to highlight the little insidious ways in which those two very human emotions intrude to take us away from our core purpose: to back authentic founders. 

So today I invite you: what would your company or life look like if you removed all fear and greed? 

Music Saturday - Ave Verum by Philip WJ Stopford

I came across Philip WJ Stopford's work a few years ago and was blown away that this was a modern, young composer. He's currently Director of Music at Christ Church in Bronxville, NY. 

My favorite work of his is the Ave Verum here:

Ave Verum is a short, Eucharistic hymn by Pope Innocent VI (text here). It's a reflection of redemption through suffering as viewed in the transubstantiation. I'm not on board with all of that, but it's a beautiful piece of music. Enjoy.

Contemplation: witnessing

Paul Donner asked in a comment earlier this week about what I, foolishly perhaps, called the "voice" that your "core" can find in silent sitting and, further, how to distinguish between truth and ego (projection) in such realization, and to give examples of insights and their impact on my life.

Phew. Those are some great, tough questions and I feel very vulnerable writing these lines. Vulnerable to the point of putting off writing this post day after day. 

Not only are these experiences highly personal. But they are also wildly open to interpretation. Modern/rational society is uncomfortable going so deep into the self - because it isn't rational in the empiricist sense. And post-modern/pluralist thought, overly critical of the power structures of organized religion, is quick to deny any hierarchy in actualization. I would indeed ask that you realize that language is key to thought and that all experiences communicated are thus subject to the misunderstandings inherent in communication.

So here it goes.

Perhaps the second most powerful experience of sitting in meditation/contemplation for me has been the experience of what many commentators call "the witness." The best way I've found to describe what it's like is the following:

You're sitting and doing what most practices recommend: initially you focus on your breath or a "sacred" word that allows you to come back to the present. Thought arises, sensation occurs - and you bring it gently back to the here and now. So you're sitting there, just being. Over time (and I mean days, weeks, months), fewer thoughts and emotions and things arise, and you get better at letting them go. You don't drift as much. So far, so Headspace.

But this next bit is powerful for me. As you're sitting there, just being fully present, complete in the now, you gently... take a step back. And now you're contemplating yourself, just sitting there. And it's a very powerful, out-of-body, away-from-all-the-stories-you've-made-up-about-yourself experience. This is important: it's a powerful experiential shift in consciousness or awareness.

And then, of course, the interpretation of what the heck that was starts. And, frankly, that's above my paygrade but I will say this: I believe that part of you that's witnessing is probably as close to "authentic" or "soul" as we can experience in this meatbag. And isn't that a wonderful (and yes: comforting) thing.

How do I know this isn't ego or projection? How do I know that's "truth"? Well, I certainly know that it isn't empirical truth. It may not even be rational truth. But it very clearly is relatable, experiential truth. And if you look at similar experiences that other practitioners have had, I am certainly not alone in my delusions - if that's what they are.

As to what impact it has had on my life: I believe more in an irreducible "Being" principle than I have before. And I won't hesitate in calling that Being "soul" and to propose that everyone has this thing. It's just a matter of dropping the less important stuff. And that means, if we can all experience this reduced form of what it means to "Be Alive", there are significant concordant implications of empathy, compassion, connectedness and, really fundamentally, ethics and morals that result. 

Thanks for hearing me out and - keep practicing.

P.S. Did you read closely? I said "second most powerful experience...for me." Stay tuned. 


The need for silence

Last week I wrote about crazy startup schedules and what is, in my view, their main driver: fear. Since it's Sunday, I thought I'd introduce the antidote: silence.

Silence, and in particular sitting in silence for habitual periods every day, has enormous benefits. For one, silence is the only tool that is able to create discernment in a very loud and very fast world. Secondly, it throws you back on your core - mind, spirit, soul - and asks the fundamental question of who you really are. Thirdly, if you listen in silence long enough, this core will find its voice that you can take back to the world with you. And it lets you gaze at what is in wonder.

For the thinking person, there is no way around giving at least tentative answers to the big, unbearable questions demanded by our existence. The path starts out easy - there are immediate and recognizable benefits from sitting. But it becomes steeper as you go, until you get to that sheer cliff or that abyss and you start to realize that you have to climb or jump and then that it isn't really a mountain and there isn't a path and there isn't an end to this and let me just go back to check Facebook please and thank you. The dark night of the soul awaits. 

All great wisdom traditions advocate sitting in silence: Buddhism with meditation, Christianity with contemplation and centering prayer, Sufi Islam with muraqabah, Judaism with hitbonenut, and many others. You may be more attracted by something more seemingly secular, like using Headspace or learning Westernized Zen. Just note that while the latter two do change consciousness, the interpretation of what has changed is pretty much left entirely up to you. Which seems a pity given that so many have come before us and have thought long and hard about things. 

Neuroscience has made some startling discoveries about what meditation or contemplation do to our brain, in particular the anterior cingulate cortex. Recent findings suggest these changes seem more pronounced when intermingled with faith (crucially: what that belief is is not important). 

Do understand that I'm not saying that you need silence so you can improve in order to function well as an executive - I'll leave that to the quantified-self content marketers and neo-liberal self help gurus. You need silence for a life well lived, to be happy, and most importantly to be your authentic self. 

Have a good start to the week.


Music Saturday - Khatia Buniatishvili

I've decided to post non-startup related stuff on the weekends. So today I'd like to give you this wonderful rendition of the (somewhat overplayed) second piano concerto by Rachmaninov. I'm a romantic at heart. The pianist Khatia Buniatishvili is a young French-Georgian. Not only is she immensely technically proficient, but she plays with perfect temperament and immense heart.

Her latest full album has the concerto conducted by Paavo Järvi, which you may prefer. I do like seeing her play, though. 

What's on your agenda? Fear

Yesterday I wrote a bit about the crazy packed schedules I see in the startup world. Don’t get me wrong: hard work is good. Hard work is what life asks of us, sometimes. But I wanted to add a bit more on that topic.

What’s the root of the most out-of-control agendas? Something that we don’t talk about enough in the business world: fear. 

- Fear of failure (and thus a fear of being rejected, never being enough, not being worthy, etc.)
- Fear of uncertainty (and thus a need for control, etc.)
- Fear of forgetting something (and thus obsessive behaviours and manias)
- Fear of missing out (and thus an accompanying underlying dread of the unknown unknowns) 

Fear is pernicious. It makes you bungle other things: 

- Less focus: you need filters on what’s important – if everything potentially is, or if some things are suddently perceived as very threatening, it’s hard to stay focused
- Less delegation: uncertainty erodes our confidence and makes us seek control, making it harder to delegate
- Less trust: the more fearful we are of our environment, the less we’ll trust the people in it
- Less self-care: fear makes us unaware of our own needs, because threats are perceived as more important to deal with 

The hardest-working entrepreneurs I know are seen as uncaring. They’re heads-down in their work. They often know that business is about people, not things. But fear makes them forget.

At this point, I was about to write: “life is too short to live it in fear.” Do you see how subtly harmful fear is? I’m telling you how managing fear is important by trying to scare you!

Fear is a habit. It was useful when you were about to get mauled by a mountain lion and the adrenaline saved your skinny butt. But in startups, fear sucks. I’ll write more about dealing with it (as an ex-super-high-anxiety person, I’ve learned a thing or two).

For now, manage by walking around, even if it’s hard to measure the effectiveness of that. Your people need (to see) you! When you have a one-on-one, don’t glance at your computer or phone. Ask for personal background stories. Write thank you notes. Nail the basics.