It strikes me as implausible that the best way to make money in technology is to try to make the most money right away. So I would go a step further back than you and look for good learning opportunities rather than ones which will make a lot of money.
To this end, I think a company’s degree of sponsorship is often underrated when people are making decisions. I wrote more about this here.
Startups are an extremely mixed bag when it comes to learning opportunities. You will be given a lot more responsibility than you would in a big company, but you also receive less mentoring and you will have to do a lot more grunt work that would be outsourced to lower skilled people in a big company. My guess is that the average big company is a better employer than the average startup for people who are earning to give.
To the extent you do want to join a profitable startup, I would guess that it’s very hard to outperform professional investors. So if they’ve recently raised funding it’s probably best to just assume that valuation is correct, but it could be tricky if they haven’t raised recently. If they haven’t raised recently because they’ve got a good cash flow, you could look at EBITDA or revenue multiples; if they haven’t raised recently because they can’t find investors then that’s probably a red flag.
To the extent you do want to join a profitable startup, I would guess that it’s very hard to outperform professional investors.
Although I’m a fan of this attitude in general, venture investment is not the ideal candidate for the efficient market hypothesis, and investors have very different deal structure from employees. Some notes:
VCs manage other people’s money, which means they’re basically buying options on the startups, not the startups themselves. As a result they do a lot of variance-chasing.
The market for venture investments is incredibly illiquid. It’s virtually impossible to short sell them, for instance, which inflates valuations.
The things that get traded in a venture deal are not just cash. A company that got valued at $10m by Sequoia is likely more valuable than one that got valued at $10m by a first-time investor. Similarly, a company that got valued at $10m in a round where the VC got a 3x liquidation preference is much less valuable than the equivalent with no liquidation preference.
Anecdotally, investors often do not know very much about the businesses they invest in and do not understand them well. My impression is that most venture investors are not much better than an index of startups, but mostly profit/​stay in business because (a) the entire sector is growing and (b) they’re the ones with access to dealflow.
In summary, investor valuations are biased high, probably by a large factor IMO, and also have incredibly high variance. I would use them only with extreme caution.
It strikes me as implausible that the best way to make money in technology is to try to make the most money right away. So I would go a step further back than you and look for good learning opportunities rather than ones which will make a lot of money.
To this end, I think a company’s degree of sponsorship is often underrated when people are making decisions. I wrote more about this here.
Startups are an extremely mixed bag when it comes to learning opportunities. You will be given a lot more responsibility than you would in a big company, but you also receive less mentoring and you will have to do a lot more grunt work that would be outsourced to lower skilled people in a big company. My guess is that the average big company is a better employer than the average startup for people who are earning to give.
To the extent you do want to join a profitable startup, I would guess that it’s very hard to outperform professional investors. So if they’ve recently raised funding it’s probably best to just assume that valuation is correct, but it could be tricky if they haven’t raised recently. If they haven’t raised recently because they’ve got a good cash flow, you could look at EBITDA or revenue multiples; if they haven’t raised recently because they can’t find investors then that’s probably a red flag.
Although I’m a fan of this attitude in general, venture investment is not the ideal candidate for the efficient market hypothesis, and investors have very different deal structure from employees. Some notes:
VCs manage other people’s money, which means they’re basically buying options on the startups, not the startups themselves. As a result they do a lot of variance-chasing.
The market for venture investments is incredibly illiquid. It’s virtually impossible to short sell them, for instance, which inflates valuations.
The things that get traded in a venture deal are not just cash. A company that got valued at $10m by Sequoia is likely more valuable than one that got valued at $10m by a first-time investor. Similarly, a company that got valued at $10m in a round where the VC got a 3x liquidation preference is much less valuable than the equivalent with no liquidation preference.
Anecdotally, investors often do not know very much about the businesses they invest in and do not understand them well. My impression is that most venture investors are not much better than an index of startups, but mostly profit/​stay in business because (a) the entire sector is growing and (b) they’re the ones with access to dealflow.
In summary, investor valuations are biased high, probably by a large factor IMO, and also have incredibly high variance. I would use them only with extreme caution.