Value isn’t the same as Valuation

An investor friend of mine lost a deal recently. As it turned out, the founders received a higher valuation offer, and they decided to go with the other lead investor. In a world prone to an obsession with valuation, I could understand the rationale.

It is often said about the venture capital business: owning a small slice of a watermelon is better than a large chunk of a grape. I liked the analogy. But only the last few days did I realize I had mistaken what it meant.

Yesterday there were some good news. The Branch team got picked up by Facebook for $15 mn. I am really happy for my friend Hursh, co-founder of Branch. Branch had some really well connected angel investors on board from very early on. The acquisition reflected the “value” the team and investors created. It was perhaps not the behemoth exit they had dreamed of and gone into the venture with, but I surmised, the economics must have made sense for everyone involved.

But “value” isn’t the same as “valuation” #

This is the part that intrigues me to write this post. Had Branch received a astronomical valuation from its angels early on, could they have sold at this price?

This brings me back to the saying of the grape versus the watermelon. I realized I made a mistake in its interpretation for a long time. I thought it was referring to “valuation;” it really is more apt if we focus on the “value” instead.

It sure is a lot more exciting to own a small chunk of a lot of “value.”

Where does that leave us? #

On the other extreme, yesterday, there was the behemoth of the Google-Nest Labs deal ($3.2 Bn); this was a much more matured venture exit with multiple rounds of funding.

Do deals like this make us focus on the “valuation” part too much? In conversations with a lot of early stage teams (pre-seed) at JFDI, many founders are obsessed with the dollar figures—even though we offer convertible notes.

I want to point out that, at this early stage, “valuation” is the last thing that is important. How can we help entrepreneurs see that it’s the “value” we can co-create through the Accelerator program that matters much more?

In Summary #

I feel strongly about this and would love to hear more angel investors and early stage institutional investors talk about this in Asia.

Especially in Asia—where “valuation” seems to be the obsession.

I want to focus on “value.” Let’s change that.

ps. We are about to start a new class JFDI.2014A for the 100-day accelerator program. Give me a shout!