"Seed-stage valuations aren’t valuations"
Do you find Nnamdi Iregbulem's quote above spicy or simply common-sense?
Loved his recent Substack post yesterday diving into the obvious strangeness of US seed-stage startup valuations – like it enough to overlook him using Pitchbook figures instead of our Carta data 😁
His argument in his own words:
𝘚𝘦𝘦𝘥 𝘷𝘢𝘭𝘶𝘢𝘵𝘪𝘰𝘯𝘴 𝘥𝘰𝘯'𝘵 𝘣𝘦𝘩𝘢𝘷𝘦 𝘭𝘪𝘬𝘦 𝘷𝘢𝘭𝘶𝘢𝘵𝘪𝘰𝘯𝘴:
𝘛𝘩𝘦𝘺 𝘢𝘳𝘦 𝘵𝘰𝘰 𝘴𝘵𝘢𝘣𝘭𝘦 𝘰𝘷𝘦𝘳 𝘵𝘪𝘮𝘦 𝘧𝘰𝘳 𝘴𝘶𝘤𝘩 𝘢 𝘴𝘱𝘦𝘤𝘶𝘭𝘢𝘵𝘪𝘷𝘦 𝘢𝘴𝘴𝘦𝘵
𝘛𝘩𝘦𝘺 𝘢𝘳𝘦 𝘪𝘮𝘱𝘦𝘳𝘷𝘪𝘰𝘶𝘴 𝘵𝘰 𝘴𝘩𝘪𝘧𝘵𝘪𝘯𝘨 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵 𝘳𝘢𝘵𝘦𝘴
𝘛𝘩𝘦𝘺 𝘥𝘰𝘯’𝘵 𝘧𝘰𝘭𝘭𝘰𝘸 𝘱𝘶𝘣𝘭𝘪𝘤 𝘵𝘦𝘤𝘩 𝘷𝘢𝘭𝘶𝘢𝘵𝘪𝘰𝘯𝘴
𝘚𝘦𝘦𝘥 𝘤𝘰𝘮𝘱𝘢𝘯𝘪𝘦𝘴 𝘥𝘰𝘯’𝘵 𝘴𝘦𝘦𝘮 𝘵𝘰 𝘣𝘦 𝘱𝘳𝘪𝘤𝘦𝘥 𝘢𝘴 𝘣𝘶𝘴𝘪𝘯𝘦𝘴𝘴𝘦𝘴 𝘸𝘪𝘵𝘩 𝘪𝘯𝘵𝘳𝘪𝘯𝘴𝘪𝘤 𝘷𝘢𝘭𝘶𝘦 𝘥𝘦𝘳𝘪𝘷𝘦𝘥 𝘧𝘳𝘰𝘮 𝘧𝘶𝘵𝘶𝘳𝘦 𝘤𝘢𝘴𝘩 𝘧𝘭𝘰𝘸𝘴. 𝘙𝘢𝘵𝘩𝘦𝘳 𝘵𝘩𝘢𝘯 𝘷𝘦𝘯𝘵𝘶𝘳𝘦 𝘤𝘢𝘱𝘪𝘵𝘢𝘭, 𝘵𝘩𝘦𝘺 𝘴𝘦𝘦𝘮 𝘵𝘰 𝘣𝘦 𝘢 𝘱𝘳𝘰𝘹𝘺 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘩𝘶𝘮𝘢𝘯 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘰𝘧 𝘵𝘩𝘦 𝘧𝘰𝘶𝘯𝘥𝘦𝘳𝘴 𝘢𝘯𝘥 𝘦𝘢𝘳𝘭𝘺 𝘵𝘦𝘢𝘮.
Worth reading the full piece here: https://lnkd.in/gJcRcXTx
When we overlay our Carta data on top of this thesis, I find it compelling. The chart below shows seed-stage valuations over the last 18 months or so by sector. Two points stand out:
Those figures are historically quite high, even in this wild interest-rate period.
They are all over the place. Huge distributions in valuation for what should mostly be very nascent companies.
I think it's more useful for founders to view seed-stage valuations as the product of calculations beyond revenue or cash flow. They are simply 𝘁𝗵𝗲 𝗲𝘅𝗽𝗿𝗲𝘀𝘀𝗶𝗼𝗻 𝗼𝗳 𝘀𝘂𝗽𝗽𝗹𝘆 𝗮𝗻𝗱 𝗱𝗲𝗺𝗮𝗻𝗱 𝗳𝗼𝗿 𝘁𝗵𝗲 𝗳𝗼𝘂𝗻𝗱𝗲𝗿𝘀 rather than a concrete measurement of the underlying business.
As a secondary point, these valuations are also heavily dictated by ownership targets on the investor side and willingness to dilute on the founder side. When those two forces match, voilà, a valuation appears.
So don't get too hung up on headlines about crazy seed valuations - or spend much time thinking about why they aren't more sensitive to overall macro-economic conditions.
Seed-stage valuations aren't valuations indeed.
It's a good idea to go directly from this post to Nnamdi's profile and follow him. I learn something every time he posts.
#startups #seedstage #valuations #founders #seed
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