The Voting Machine vs. The Weighing Machine

If a VC blog post doesn’t include the term “Unicorn” does it actually exist? Much of the week’s column space (in the early stage world, at least) cautiously celebrated massive growth funding announcements and debated the dynamics of the VC <> entrepreneur relationship in light of the Secret shutdown.

Money continues to pour into growth rounds but the takeaway isn’t clear and likely won’t be for some time. In the cases of Zenefits, Slack, and others, we have companies with impressive growth going after massive addressable markets while raising what some think is too much money at unsustainable valuations that places an onerous amount of pressure on the companies to maintain their rapid growth trajectories.

To paraphrase Benjamin Graham, the popularity contest comprised of TechCrunch clippings and VC dollars chasing the next hot deal (the short term voting machine) will eventually give way to the long term market weighing machine where the underlying performance of the companies in questions will matter more than the often fickle opinions of people on Sand Hill Road.


What We Learned This Week

1. Valuation is – and probably shouldn’t be – becoming the “entrepreneur’s scorecard”

USV’s Fred Wilson advises founders, and the people investing in them, to fight against the market’s influence to use a number to measure the entire worth of the company. Things like whether employees and customers are happy, whether you the business you are building is becoming sustainable, and whether the brand you are building is gaining respect are much more important in the long term.

2. Companies and investors looking for perfect seed rounds should focus on simplicity.

A great lead investor surrounded by value added angels who invest in a round at a reasonable valuation (while keeping the terms as vanilla as possible) is what it takes to make the perfect seed round.

3. Focus on building “forever companies”, not “Unicorns”

Andrew Chen looks to Amazon’s Jeff Bezos as an example of someone building a high growth, scalable forever company and advises founders and investors that these types of organizations don’t have to be “lifestyle businesses”.

4. Companies seem to be specifically negotiating for $1 billion valuations

Law firm Fenwick & West dug into the deal terms for 37 recent U.S.-based venture backed companies recently valued at over $1 billion. Prevalence of dual class voting structures and downside protection for investors are just a couple of the key takeaways from the report.