This. Why does Silicon Valley always miss the effing obvious?
The best way to assess a startup's value is to play a bank evaluating them for a traditional no-frills loan. How risky a debt the bank considers it is a fair measure of the value of the company (and in most non-public cases, it will be negative EV, future revenues be damned). Not the BS analyses made by IBD teams at banks, and not the "valuations" ascribed to the startup by its cash-rich, opportunity-deprived VCs.
> The best way to assess a startup's value is to play a bank evaluating them for a traditional no-frills loan.
In Shoe Dog by Nike co-founder Phil Knight, he describes how the banks kept refusing to borrow them money because they refused to value based on future cash flows. Eventually, Nike switched to another bank. The first bank could have made a lot of money there.
In general, even Buffett after years of very conservative valuations (Sigar Butt Investing) switched to "buying great companies at fair prices". Why would you buy a company that barely keeps up with inflation if you could buy one that literally grows exponentially. If you hop from Sigar Butt to Sigar Butt, you can also grow your money exponentially, but it's harder because you pay more taxes, brokerage fees, and have to work more on finding the right enters and exits. Conversely, if you are as clever as the Nomad Investment Partnership and just only bought and hold Costco, Berkshire, and Amazon from 2005 to now, you would have gotten great returns on investement without having to do a thing.
One could also use that story to illustrate my point too. Phil Knight was being transparent with his banks on the books. His American bank thought he was cooking the books, his Japanese bank saw the growth rate of Nike's cash flows and loaned him the money based on that. It was not idle speculation in an ivory tower (or a Sand Hill Road office) like most VCs today. How many VCs even use a DD audit in the final stages of their Series D+ investment?
The second thing is that Nike had the cashflow to show in its books, unlike most of today's startups. Stuff was moving off the shelves super fast, and they were making a neat profit on every sale. It wasn't like a tech startup purposely underpricing itself initially then worrying when users don't retain after future price hikes. To put it another way, Nike would have been attractive for a PE firm today, unlike most startups today.
I completely agree with you that some/many VCs spend money on ridiculous business models. On the one hand, it seems like a waste of resources. On the other hand, you could also say that it's a great way for innovation to happen. Maybe some ideas made no sense at all, but worked and lead to a technological breakthrough? If VCs wouldn't fund moonshot ideas with many millions then who? Apart from a few universities, most universities I've been are absolutely terrible at getting people and resources aligned towards a common goal.
There's a difference between VCs funding a moonshot idea and VCs funding some stupid idea. For instance, Amgen and Genentech were founded by VCs, with VC funding, as were Google, Amazon, etc. The difference back then was that VCs actually did their due diligence as part of their duty. Back then, it was much harder to get VC funding in the first place - the science had to be at least 90% sound, the metrics had to be solid, the numbers out with an open book. For example, Google only raised a $25m Series A by the time they were already widely well known, almost a household name.
My critique is not about the VC funding model. It's about VCs not doing any due diligence these days but just chasing the next hype cycle.
That's a different kind of business problem. Each transaction is profitable but profits are not sufficient to grow fast. This is different from each transaction being a loss.
This. Why does Silicon Valley always miss the effing obvious?
The best way to assess a startup's value is to play a bank evaluating them for a traditional no-frills loan. How risky a debt the bank considers it is a fair measure of the value of the company (and in most non-public cases, it will be negative EV, future revenues be damned). Not the BS analyses made by IBD teams at banks, and not the "valuations" ascribed to the startup by its cash-rich, opportunity-deprived VCs.