Is There a Y Combinator Valuation Bubble or Not?(launch.co)
launch.co
Is There a Y Combinator Valuation Bubble or Not?
http://www.launch.co/blog/is-there-a-ycombinator-valuation-bubble-or-not.html
74 comments
Obviously small exits are more numerous, but most of the returns actually come from the larger exits. Of the first 200 yc companies, Dropbox is worth more than all of the others combined (at current valuations, maybe in five or ten years it will be airbnb or one of the others, but I expect that the general principle will still hold true). Therefore, the value of a high-priced startup is determined by estimating the odds that it is the next DropBox (or Google or Facebook).
Ah, but YC has the luxury of funding 200+ companies, a founder can never hope to start that many in a lifetime.
I think he might have been trying to make an orthogonal point.
I think he's saying that, because many first time entrepreneurs would happily take a $XX million offer to sell, most will sell early rather than holding out for a chance to be the next Dropbox. So even if the potential/expected value to be a billion dollar company is there, factors that are harder to calculate might ultimately determine exit value.
That's part of the "odds that it will be dropbox" calculation. It's also why we invest primarily in founders and not ideas.
Interesting point. I view YC's strategy as playing the central limit theorem -- taking a high-volatility random variable (startup returns) and increasing the sample size until the sample mean tends arbitrarily close to the population mean.
Smart, guys.
Smart, guys.
YC has had a few small-exit founders come back though--do you hold that into consideration? In other words, would you fund an unambitious startup if it gave a promising entrepreneur a potential launchpad to go bigger next time?
Entrepreneurs don't look too promising if their startups are clearly "unambitious".
Unambitious is relative. Posterous was less ambitious than Airbnb, for instance. The Fridge was less ambitious than Heroku.
Bottom line:
(a) We're not in a bubble. We're in a revenue tsunami like nothing any of us have ever seen in our lifetimes.
Instagram didn't have a single dime of revenue. and the CEO basically waved away any thoughts of revenue when pointedly asked about it in an interview.
Facebook, who has 800M active, engaged users has only $4B in revenue. Is that what passes for a revenue tsunami these days? Guys, a revenue tsunami looks like double digit income growth quarter after quarter.
NB: Kudos to the CEO of instagram for making out like he did. But it's not an example to follow. Unless you like failure.
(a) We're not in a bubble. We're in a revenue tsunami like nothing any of us have ever seen in our lifetimes.
Instagram didn't have a single dime of revenue. and the CEO basically waved away any thoughts of revenue when pointedly asked about it in an interview.
Facebook, who has 800M active, engaged users has only $4B in revenue. Is that what passes for a revenue tsunami these days? Guys, a revenue tsunami looks like double digit income growth quarter after quarter.
NB: Kudos to the CEO of instagram for making out like he did. But it's not an example to follow. Unless you like failure.
I couldn't agree more. Apple, Google and Microsoft are revenue tsunamis. Instagram, Uber, Airbnb etc. may as well be operating in a different universe in comparison.
Microsoft revenues grew 15% over the past 4 years. Large company, yes, but hardly a quick moving power like a tsunami. Google grew 85% in the period. Stellar for a company of that size but tsunami? Depends who you ask. Apple grew 190%+ during that period. Tsunami? Hell yes
Uber, Airbnb, and other hot companies like Square, Dropbox, Box, and Fab are generating lots of revenue and (probably) all growing much, much faster than any of the companies listed above. Sure they have smaller bases and thus can grow at faster rates, but they are becoming quite big, quite quickly. Having that many companies growing so explosively doesn't happen so often. And that's not to mention the growth that Zynga and Facebook also are having. Kleiner Perkins said Zynga was their fastest growing company in history - and they backed Amazon and Google!
To be clear, I'm not talking about the bubble. Just pointing out that there are many companies in this current wave that have obscenely strong revenue growth (Instagram obviously not being one of them)
Uber, Airbnb, and other hot companies like Square, Dropbox, Box, and Fab are generating lots of revenue and (probably) all growing much, much faster than any of the companies listed above. Sure they have smaller bases and thus can grow at faster rates, but they are becoming quite big, quite quickly. Having that many companies growing so explosively doesn't happen so often. And that's not to mention the growth that Zynga and Facebook also are having. Kleiner Perkins said Zynga was their fastest growing company in history - and they backed Amazon and Google!
To be clear, I'm not talking about the bubble. Just pointing out that there are many companies in this current wave that have obscenely strong revenue growth (Instagram obviously not being one of them)
You mess up your argument by including Uber & AirBnB in that list, both of which make good and growing revenues.
I wouldn't class either as tsunamis and doubt they will ever be in the league of an Apple, Google or Microsoft.
You realize you just named 3 of the very largest companies the world has ever seen and all just a few decades old. That's a pretty high bar.
Yes I do, that's why they are called revenue tsunamis. I guess my issue is that I don't see why if a new online startup is managing to make some revenue, this suddenly means it is a "revenue tsunami". Comapred to Instagram ok, compared to Apple et al - no.
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The revenue tsunami was a strange one for me as well. What exactly is he referring to? There are many things I could point out about the good financial aspects of seed fund startups but a current revenue tsunami is not something that personally comes to mind.
Could have made that point more clearly I guess. Zynga, Airbnb, Dropbox and OMGPop all have massive revenue growth. Instagram could have easily had massive revenue, they just--wisely it seems--decided to make filters free. Hipstamatic charged for filters, had a fraction of the user base and never hit real scale. If Hipstamatic makes $5,000 a day / $2M a year (which it might), then they made $2M a year on tens of thousands of users vs. Instagram's $0.00 a year on tens of millions of users.
Of course the best thing to have is tens of millions of users and revenue (Zynga, OMGPOP).
Of course the best thing to have is tens of millions of users and revenue (Zynga, OMGPOP).
It's like business economics is flipped upside down in Silicon Valley. Social networks that make little or no revenue are valued higher than companies who do have revenue. Is earning money a stigma? It's as if you're better off not even trying to earn money, and just pretend that when you do try to monetize that money will magically flow into your bank account.
"It's as if you're better off not even trying to earn money,"
If you don't have anything good to say don't say anything at all.
If you don't have anything good to say don't say anything at all.
Better to ignore revenue and be thought worthless, than to attempt to make money and remove all doubt.
(paraphrasing)
(paraphrasing)
For those who aren't aware, this is an adaptation of a quote from Abraham Lincoln, which went "Better to remain silent and be thought a fool, than to speak and remove all doubt."
I've also seen it attributed to Mark Twain as well.
I've also seen it attributed to Mark Twain as well.
I'm not qualified to opine whether there is a bubble or not, but having recently visited the tech start-up scene in SF & SV from my economically depressed corner of the country it definitely feels unworldly. The rest of the country is slogging along with poor growth or outright contraction and I think it is wonderful that somewhere people are still bringing good ideas and hungry money together. As we say down South, "make hay while the sun's still shining."
Bubble or no bubble it's a good time to make something happen.
Bubble or no bubble it's a good time to make something happen.
Fun lesson in line with some of the comments.
I worked with an app co that stuck on millions of users and never earned a dime in revenue.
While the CEO was going manic about potentially running out of money, one of the advisors (who had recently sold for $100m+) emphatically insisted that we NOT generate revenue.
His reasoning?
The minute you turn on revenue you eliminate the "story" about the revenue potential.
The result?
A beautifully large exit to a entrenched and old school player.
Hook. Line. Sinker.
I worked with an app co that stuck on millions of users and never earned a dime in revenue.
While the CEO was going manic about potentially running out of money, one of the advisors (who had recently sold for $100m+) emphatically insisted that we NOT generate revenue.
His reasoning?
The minute you turn on revenue you eliminate the "story" about the revenue potential.
The result?
A beautifully large exit to a entrenched and old school player.
Hook. Line. Sinker.
I'm guessing, due to Paul G's awesome track record, that 50% of YC startups will get A rounds (I pulled that number out of the air, someone fact check me).
Not accurate. Out of ~45 companies in the W11 batch I think 4-8 have raised A rounds. There's still time for others, but I don't think there's any way that number will approach 20+.
Not accurate. Out of ~45 companies in the W11 batch I think 4-8 have raised A rounds. There's still time for others, but I don't think there's any way that number will approach 20+.
Isn't that in part because the pre-A funding options have gotten so much better? In the early 00's, a normal progression might have been "~100-500k angel", followed by "2MM-4MM A". Now it's "~100-200k seed", followed by "up to maybe 1.5MM in rolling convertable note financing", so that by the time you need to pull the trigger on an A, you're already pretty far down the road.
Yes, that's true. A rounds are becoming de facto B rounds.
If Jason had written that 50% of companies would raise an amount of money that a few years ago would have meant an A round, he might have been close to the truth, but I don't think 50% will raise money using documents that say "Series A" on them.
If Jason had written that 50% of companies would raise an amount of money that a few years ago would have meant an A round, he might have been close to the truth, but I don't think 50% will raise money using documents that say "Series A" on them.
Who do I need to talk to for that kind of seed? :)
Look one comment up.
My understanding of "seed" was that it was used to get the thing off the ground, i.e. "I don't even have a real demo yet, but I really believe in this". I don't think YC is going to let you in on that, right? Even if they do, forcing me to move back to the US for 3 months is a pretty steep price. :(
Thanks for the fact check. When folks raise their angel rounds they have 18 months or runway, so I could see the 6 turning in 20. Which might be 1/3rd. Raising an A-Round is HARD because VCs only do 1.5 deals a year each individually (10 boards/investments over the lift of a 7-10 year fund).
Right, but (anecdotally) many won't because of dilution / board control issues that come with raising VC. Raising 1.5M in notes / AA may be enough to hit profitability.
It only feels like a bubble because of structural unemployment.
We wouldn't be talking about a bubble if blue-collar workers had the same opportunity that white-collar workers do. (Yeah, I know, I can't find a better term for the groups.)
Also, the vast amount of economic activity is happening in SF/SV and in NY. Raising money outside of these two centres is much harder. This is one facet of structural mismatch between supply and demand. One part of the 500 Startups thesis is to find under-valued startups that don't happen to be in the major tech centres.
We wouldn't be talking about a bubble if blue-collar workers had the same opportunity that white-collar workers do. (Yeah, I know, I can't find a better term for the groups.)
Also, the vast amount of economic activity is happening in SF/SV and in NY. Raising money outside of these two centres is much harder. This is one facet of structural mismatch between supply and demand. One part of the 500 Startups thesis is to find under-valued startups that don't happen to be in the major tech centres.
More like a funding tsunami, where there's a lot of easy money floating around from all those finance guys and tech vets who cashed out last time around. I'm sorry, but when you start talking about how many users a site has and then using that metric as a comparison for the valuation of the site that acquires it... you're in a bubble. Why? Because nowhere in that thought process does revenue come into play.
A relevant graphic/talk from a board I found on Quora:
http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-...
In it Steve Jurvetson (a Draper Fisher Jurvetson VC) shows the cyclical nature of capital, and how we seem to go from a PE boom and bust, to a VC boom and bust every ~7-10 years, with recessions interspersed in between.
YC appears to be near the centre of this new growth period, bubble or not, and is hence probably a beneficiary of the long term swings in global credit/capital.
Guess we'll just have to see how it plays out.
I hope it isn't that, and we have great companies, with solid business models (profit/revenue), without the mania that we had before.
But who knows, with the JOBS act passed (last week), and the consequent relaxation in securities regulations we may have sown the seeds of an unpleasant moment in the near future.
Talk:
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2288
JOBS Source:
http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
JOBS Act criticism:
The Consumer Federation of America characterized an earlier version of the legislation as "the dangerous and discredited notion that the way to create jobs is to weaken regulatory protections"
Criminologist William K. Black had said the bill would lead to a "regulatory race to the bottom" and said it was lobbied by Wall Street to weaken the Sarbanes–Oxley Act.
"gutting regulations designed to safeguard investors", legalizing boiler room operations, "reliev[ing] businesses that are preparing to go public from some of the most important auditing regulations that Congress passed after the Enron debacle" and "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital".
http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-...
In it Steve Jurvetson (a Draper Fisher Jurvetson VC) shows the cyclical nature of capital, and how we seem to go from a PE boom and bust, to a VC boom and bust every ~7-10 years, with recessions interspersed in between.
YC appears to be near the centre of this new growth period, bubble or not, and is hence probably a beneficiary of the long term swings in global credit/capital.
Guess we'll just have to see how it plays out.
I hope it isn't that, and we have great companies, with solid business models (profit/revenue), without the mania that we had before.
But who knows, with the JOBS act passed (last week), and the consequent relaxation in securities regulations we may have sown the seeds of an unpleasant moment in the near future.
Talk:
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2288
JOBS Source:
http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
JOBS Act criticism:
The Consumer Federation of America characterized an earlier version of the legislation as "the dangerous and discredited notion that the way to create jobs is to weaken regulatory protections"
Criminologist William K. Black had said the bill would lead to a "regulatory race to the bottom" and said it was lobbied by Wall Street to weaken the Sarbanes–Oxley Act.
"gutting regulations designed to safeguard investors", legalizing boiler room operations, "reliev[ing] businesses that are preparing to go public from some of the most important auditing regulations that Congress passed after the Enron debacle" and "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital".
It assumes that you can a) get into the YC rounds
(which 95% of angels can not) and b) there are
other deals out there as good as the YC deals
(80% of angel deals I see are not as refined as YC
startups).
That's probably where YC derives most of its value.
I've always thought that the OMGPOP buy was an excellent deal for Zynga and the Instagram buy a terrible deal for Facebook.
OMGPOP is adding a significant amount to Zynga's topline revenue. Last reported, OMGPOP was bringing $250k per day.
Instagram? $0/day. Not harsh but just the truth.
OMGPOP doesn't scream bubble at all. Instagram's deal does. So are we in a bubble? The answer is in the eye of the beholder.
OMGPOP is adding a significant amount to Zynga's topline revenue. Last reported, OMGPOP was bringing $250k per day.
Instagram? $0/day. Not harsh but just the truth.
OMGPOP doesn't scream bubble at all. Instagram's deal does. So are we in a bubble? The answer is in the eye of the beholder.
Also worth noting, when a bubble forms people are yelling BUBBLE the whole time. It goes on for quite a while, more and more people screaming about the BUBBLE until pretty much everyone agrees it's a bubble. Then it goes on a little longer still. Then suddenly it pops and everyone says "who could have known???"
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This is actually not true. Previous bubbles were surprising to most everyone, because the general accepted reality was that of a "New Economy." The previous tech bubble did not become widely known as a bubble until it popped.
It's not that it isn't true, it's that it doesn't matter. There are always people screaming bubble - look at the housing market collapse. The thing is, there are always people screaming the opposite. A bubble continues because more people are saying the price should be higher than are saying it should be lower. That continues to build until, suddenly, the tide shifts and then accelerates in the other direction.
The question is, can it continue to not be a bubble? With so many investors vying to invest in YC companies in angel rounds the demand is eventually going to reach an unsustainable frenzy. Good for them, as the author assumes, if they are being more conservative and not really asking what they could (25mm priced rounds) just because they could. If prices keep going up, and there's a bad batch or two (not saying there will ever be ;)) then it could go away in true bubble fashion. What won't go away is the consistency in tutelage and the invaluable, growing alumni network. The question is if there is a way to keep YC Companies from hitting that bubble and then bursting it, just by sheer force of demand and consistency of investment in an otherwise inconsistent environment?
I have a bit of a problem accepting one of the arguments in this article (under the heading "Is There a Bubble?").
The author seems to be arguing that if you look at the actual and projected growth rate for both Instagram and OMGPOP (measured in number of account signups) as a percentage of the userbase of their suitors (i.e. Facebook and Zynga respectively), then the money paid for these companies represents "EXCELLENT" value.
To me that is an absolute fallacy. OMGPOP was going for 6 odd years and almost out of cash before they stumbled upon something that worked. Draw Something caught on like wildfire but the buzz will eventually die. What comes after it? i.e. how does past performance guarantee future performance (especially given the majority of past performance wasn't great)?
Similarly, Instagram has caught on like wildfire but even the CEO admitted that they have no way to monetize the user interest. So what we have is a freebie product that people love to use to send photos and an accompanying strap line of text. Yes it's cool but it isn't curing cancer and the users are using it as a fun throwaway service. They have no loyalty to Instagram and would drop it in a heartbeat if a charge was attached to using it.
So, where is the inherent "value" in all of these user accounts & signups? Having millions of user's doesn't automatically translate to a long term money printing machine like Apple or Google.
You can apply this argument to Zynga and Facebook themselves. Facebook has 800 million users but its total yearly revenue is half of Google's annual profits (according the wikipedia entries). Zynga IPO'd at $10 a share. Almost 6 months later and the share price hasn't moved. That doesn't look like explosive growth to me.
Given all of the above it really does feel like a bubble (at least to me). All the valuations seem to be based on a house of cards...
P.S. It's 1am where I am and I'm not an econ or finance guy so if my assumptions or arguments above are wrong , I'd love to have it explained to me rather than being flamed to death :)
The author seems to be arguing that if you look at the actual and projected growth rate for both Instagram and OMGPOP (measured in number of account signups) as a percentage of the userbase of their suitors (i.e. Facebook and Zynga respectively), then the money paid for these companies represents "EXCELLENT" value.
To me that is an absolute fallacy. OMGPOP was going for 6 odd years and almost out of cash before they stumbled upon something that worked. Draw Something caught on like wildfire but the buzz will eventually die. What comes after it? i.e. how does past performance guarantee future performance (especially given the majority of past performance wasn't great)?
Similarly, Instagram has caught on like wildfire but even the CEO admitted that they have no way to monetize the user interest. So what we have is a freebie product that people love to use to send photos and an accompanying strap line of text. Yes it's cool but it isn't curing cancer and the users are using it as a fun throwaway service. They have no loyalty to Instagram and would drop it in a heartbeat if a charge was attached to using it.
So, where is the inherent "value" in all of these user accounts & signups? Having millions of user's doesn't automatically translate to a long term money printing machine like Apple or Google.
You can apply this argument to Zynga and Facebook themselves. Facebook has 800 million users but its total yearly revenue is half of Google's annual profits (according the wikipedia entries). Zynga IPO'd at $10 a share. Almost 6 months later and the share price hasn't moved. That doesn't look like explosive growth to me.
Given all of the above it really does feel like a bubble (at least to me). All the valuations seem to be based on a house of cards...
P.S. It's 1am where I am and I'm not an econ or finance guy so if my assumptions or arguments above are wrong , I'd love to have it explained to me rather than being flamed to death :)
Quick note: According to reports Draw Something from OMGPOP was generating $250,000 in net revenue per day. That's a lot of money.
True that's a lot of money but Draw Something would have to continue pulling in $250K a day for over 2 years straight just to cover their purchase price of $200 million (assuming Zynga paid cash - not sure on this).
To me your arguments seems to be sound. What is 'scary' is seeing some prices out there. They are very low. I was looking at mixpanel pricing (https://mixpanel.com/pricing/) lately. A game changer should be able to provide more than those fees per month. Especially in the analytics sector that needs solutions like crazy. I mean, a decent consultant makes 1 k per day at least, why? Are start ups asking themselves about the value they provide or they want just to hit it big: become valuable only because serving millions of people?
there was a recent blog which dealt with rationality behind such high absurd evaluations: http://continuations.com/post/19000949472/a-rational-interne...
4. The winner-take-all nature of network-effects businesses in which the dominant business can be an order of magnitude more valuable than other competitors.
So it is entirely rational given the Internet environment to see a dramatic stretching of the valuations for market leaders with network effects. It does, however, not bode well for aggregate returns for the venture capital asset class:
1. In a race to pick the winners ever earlier, valuations get stretched even for companies that have not yet proven that they really have strong network effects and that they will be the leader in their respective market.
2. These stretched early stage valuations will lead to depressed returns in a large number of companies and will also make many of these companies harder to fund. There will be more of these companies and more capital invested in them (in aggregate) than in the winners.
4. The winner-take-all nature of network-effects businesses in which the dominant business can be an order of magnitude more valuable than other competitors.
So it is entirely rational given the Internet environment to see a dramatic stretching of the valuations for market leaders with network effects. It does, however, not bode well for aggregate returns for the venture capital asset class:
1. In a race to pick the winners ever earlier, valuations get stretched even for companies that have not yet proven that they really have strong network effects and that they will be the leader in their respective market.
2. These stretched early stage valuations will lead to depressed returns in a large number of companies and will also make many of these companies harder to fund. There will be more of these companies and more capital invested in them (in aggregate) than in the winners.
Does it matter?
The fact is during this bubble, or non bubble, all of society is now online and connected and using the internet to make purchases for goods and services.
It wasn't the case during the last boom. If someone could enlighten me a little on how an exploration of things like this help move a startup forward, when we know there's plenty of profitable bootstrapped and funded startups that have become businesses.
The fact is during this bubble, or non bubble, all of society is now online and connected and using the internet to make purchases for goods and services.
It wasn't the case during the last boom. If someone could enlighten me a little on how an exploration of things like this help move a startup forward, when we know there's plenty of profitable bootstrapped and funded startups that have become businesses.
<<The $210M sale of OMGPOP and the $1B Instagram purchase feel like a bubble, but you have to step back for a moment and realize that OMGPOP was purchased for 2% of the value of Zynga and Instagram for 1% of the value of Facebook.>>
how can relative valuations prove/disprove bubble valuations? poor point in my mind.
how can relative valuations prove/disprove bubble valuations? poor point in my mind.
A priced round has 25-35K in legal fees? I'm assuming this depends on the size of the round.
A priced angel round, yes they do still happen, should not incur 25-35K in legal fees, or the angels will walk.
At least in NYC I believe the startup is expected to pay both sides' legal fees, usually with a cap.
If you're paying your VCs legal fees you're making a mistake. You don't need to do that any more. :-) You can also cap it (i.e. $10k of your legal fees). Fight for this point by saying "you want as much money in the company as possible").
$25k is fairly standard on a $4M raise.
$25k is fairly standard on a $4M raise.
Is there a bubble bubble?
With all those people talking about bubbles, what happens if the bubble bubble burts? People get back to work and are actually productive? A horrifying thought indeed.
With all those people talking about bubbles, what happens if the bubble bubble burts? People get back to work and are actually productive? A horrifying thought indeed.
Systematic overvaluation vs equivalent non ycomb companies plus the real value created by the network but not a bubble.
I feel it's money flowing from the left pocket to the right pocket of the same pants.
The upcoming Crowdfunding tsunami might also help keep valuations high.
If it comes. I remember reading the details of that bill and if I recall correctly someone mentioned that accepting crowd funding will make the founders personally liable to lawsuits over the company.
I can't seem to find the bookmark, anyone have one by chance?
I can't seem to find the bookmark, anyone have one by chance?
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it's certainly a gigantic bubble, from what I can tell.
Opposing your assertion, I will note I went to a VC party two weeks ago and I did not see a single ice sculpture. They did however have popcorn infused with truffle oil.
My new thing is to make my own popcorn in a pot as a healthier evening snack. I must try this!
Paper bag (plain brown lunch bag) and some regular kernels, with the top folded over, in the microwave for 2-3min.
Careful now, that might be patented.
[edit] I was intending sillyness, but then thought to go check if putting a bag of corn in a microwave was patented. Turns out it depends on how you fold the bag. - http://www.google.com/patents/US5200590
[edit] I was intending sillyness, but then thought to go check if putting a bag of corn in a microwave was patented. Turns out it depends on how you fold the bag. - http://www.google.com/patents/US5200590
well after being here for a few months I found if I ever put some none-hype comments I got negative scores, this by itself tells me ycombinator and many of its followers are on drug and ignoring reality.
That's lovely and definitely sounds like the most likely explanation.
However, more importantly, would you like some popcorn? We had an accident with a corn silo and an industrial cyclotron, so there's loads to go around. Needs more butter though.
However, more importantly, would you like some popcorn? We had an accident with a corn silo and an industrial cyclotron, so there's loads to go around. Needs more butter though.
Over the past 18 months, I've seen four of my friends "cash in". Most of these guys were at it for 7-10 years before the exit, and all but one of these was a sub-$30m deal.
In order to justify these "NEW" valuations, entrepreneurs & investors have to hold out for VERY high value exits, which will dramatically reduce the chances of success and statistically extend the exit time for the angels and entrepreneurs by over a decade.
For most entrepreneurs who are on their first business, $5m or $10m is a life changing amount of money - by declining exits at prices that could achieve that outcome, they are forced to keep rolling the dice, over and over again, hoping that growth continues, a new competitor doesn't emerge, someone doesn't undercut their pricing, and everything is going at 110%.
It doesn't seem to make sense on the surface of it.