A fight broke out on Twitter recently. One of the most respected entrepreneurs turned investor tweeted something along the lines of, “Startups don’t die because of high valuations.”
He argues that venture is a binary/power law game where it either works or it doesn’t. So complaining or over-optimizing on entry price is a fool’s errand.
This sparked a lot of responses from well-respected investors. Some vehemently disagreed with this position; others defended it to the 10th degree. It was interesting and fun to watch, as most Twitter scuffles are.
Part of why this touched a nerve in the early-stage venture community is because all of us – investors and entrepreneurs – are starved for a guide to success. We are thirsty for mentorship and guidance from people who’ve been successful and “know the right path.” We are all desperate for a coach. Someone to explain the game. Humans, by nature, are uncomfortable when lacking control. So we try and optimize the variables and create a plan. When we can’t plan, we look to others who we perceive as having the answers.
If I can see how far away the goal is, or where the goalie is standing, and if I know what the conditions are like – is it raining or is it windy – then I can calibrate exactly how to kick the ball to achieve the desired outcome.
But investing has exponentially more variables than soccer. So many that almost all specific advice is rendered irrelevant. In fact, what I’ve learned is that there are very few “truths” when it comes to investing. There is no guide. There are no hard and fast rules.
In general, is it better to invest at the lower valuation? Sure. Is it better if you invest in founders that understand the industry they are trying to disrupt? Absolutely. Is it better to have a larger ownership vs. less ownership? Of course. Is it better to do deep due diligence? 100%. Is it better to be patient and hold? Sure!
But so much of it depends on the circumstances. What’s your strategy? How big is your fund? What’s your model? Is it your money or others?
What might be right for one investor could be totally different for another. Is Garry right? Yes, I think so. But is Josh right? Yes, I agree with him, too. They are both right.
So my advice is: take advice with a grain of salt. Especially at the early stages, where it’s more art than science. Get comfortable operating with a lot of variability and learn to trust your instincts.