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.
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.