Friends:
Yesterday a founder texted me the play-by-play as she and an investor negotiated back-and-forth over the valuation cap in her startup’s SAFE financing. Worth noting: this number has absolutely nothing to do with the actual value of her company.
It got me thinking about startup valuations more broadly — and how “the valuation” has become the number that drives headlines, conversations, and careers in Silicon Valley. Humans have a powerful cognitive tendency to try to collapse complex, messy realities into a single representative figure. It’s how we make sense of things.
The problem is that once a number becomes the thing everyone over-indexes on, it becomes the thing everyone manipulates.
Even Sequoia — the venerable venture capital firm — has apparently been playing this game. According to a piece published this week, Sequoia has structured deals with two tranches: a large investment at a low valuation (maximizing their ownership stake) followed by a smaller investment at a sky-high valuation (generating a headline number that is pure fiction). Founders get to announce a unicorn valuation in their press release. Employees get excited.
Until they don’t. Because the inflated valuation raises the strike price on employee stock options, creating tax liabilities that wouldn’t have existed otherwise. The company got its TechCrunch headline. The VC firm gets to report a flattering paper return to its limited partners. The employees get a bill.
Which brings me to the week’s other big valuation story: SpaceX’s S-1 filing, in which the company is asserting a valuation of $1.8 trillion (higher than the combined value of all aerospace companies in the S&P 500 including Boeing, Lockheed Martin, Northrop Grumman, and RTX. I’ve read the filing and to me this number appears to be held together by cotton candy, loose string, and ketamine. I will not be buying any.
The bottom line for founders is simple, even if the incentives around you are pulling in the wrong direction: chase metrics that matter. New customers. Happy customers. Profitable customers. Real revenue. Real retention.
Vanity metrics are a distraction. Fictional metrics are a trap. Neither is how great companies are built.
Have a good week, all.
-Bret
Want future issues in your inbox?
Subscribe