When Valuation Doesn’t Matter

Most of the time, the price an investor is willing to pay to invest in your company is a hotly debated topic. Valuation is always important to founders. But for investors there are some rare times when it (almost) doesn’t matter.

When Kleiner Perkins invested in Twitter in 2010, they were criticized for completely missing web 2.0 and having to buy their way back in. No less an authority than Om Malik had this say:

“There was a time when venture capital firm Kleiner Perkins Caufield & Byers, was the first money in hot, new start-ups. These days, it seems the best KPCB can do is edge its way into hot start-ups at a massive premium like with the funding for Twitter”.

Kleiner invested in Twitter at what at the same time seemed like a very lofty $ 3.7B valuation. Three years later, Twitter is now public and worth $ 23B. So in three years that investment has generated over a 6x return (on paper). i.e. it has doubled every year. Not too shabby.

Another great example is DST‘s investment in Facebook. In 2009, DST invested $ 200M in Facebook. At the time, the company was worth $ 10B.  When Facebook went public, DST sold 1/3 of their stake for $ 1.5B! Yep, that’s right – DST made a 22x return. But like Kleiner, DST was criticized at the time of its investment for paying too much and buying their way in.

Now, I know what you’re thinking: Twitter and Facebook are crap examples because they are iconic once in a decade companies. It’s true that they are special, but they beautifully illustrate a broader point: As soon as you find a repeatable and scalable growth engine, you can raise pretty much as much as you want on the terms that you want to mine that engine.

Do you think Ryan needed $ 165M to keep the lights on at Hootsuite? Nope – but he’s clearly found a repeatable and scalable growth engine. I like to call this the sausage machine. As soon as you have figured out how to make sausages (i.e. you have a growth recipe), investors will fall all over themselves to help you make more sausages. A lot of the risk is gone at that point. You’ve figured it out. Yes, you have execution and scaling risk, but speculation as to if you can grow is gone. At that point, valuations explode.

If you look at all the big deals this year such as Uber raising $ 361M, Palantir raising $ 200M or MongoDB raising $ 150M, they all share the same trait: each company has found its engine of growth. The capital is piling behind something proven and scalable.

So, while the chances of building another Twitter or Facebook are pretty low, focus your entire company on finding that growth engine. When you have it, you too can raise big bucks.

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  • Yup. The market at the moment is heavily rewarding growth and ignoring revenues. It was not always like this and it could change again later. I am a fan of looking at growth as a viable metric but for companies still raising money, it would be smart to have a contingency plan of revenue focus if investors change their mind and start valuing revenue more.

    • Every example I mentioned measures its growth in terms of revenue growth. That is the single biggest driver of valuation

      • I was referring to companies that are still negative or almost negative cash flow but are growing phenomenally such as amazon, salesforce, Marketo. In this strong growth is the priority for the investors.

        • It is. As long as you have a business model that is profitable, growth is rewarded over bottom line profit

  • Nice angle, makes sense.

  • It really comes down to whether an investor has faith in a startup’s growth potential, and then whether they can justify a valuation that other may seen as high. There’s clearly risk at any investment stage, including putting money into startups that are rocking. As always, great insight.

    • Hey Mark. Agree with the faith issue at the early stage. Later stage it’s more about greed. Basically, I’ll pay anything to get into hits growth machine. So few companies hit this path that everyne fights to get in them. This is the coopetition dynamic for VCs. They cooperate (share risk) at the early stage. And compete for the best ones once they have proven to work

  • Love this article, very true and well articulated, thanks for sharing this Mark, I will now return the favour and share it via my networks!