LESSON 24Don’t Overvalue Your Company

The risk of embarrassment before family and friends has increased for ambitious young entrepreneurs, due to a new phenomenon that I’ve noticed in the world of startups. Not so long ago, the billion-dollar startup was so mythical that it was called a unicorn. Today, Fortune magazine keeps a running list of private companies topping $1 billion valuations, which numbered 174 the last time I looked, including the following American companies in the top 10: Uber, Snapchat, Pinterest, and SpaceX.1

The result is that young entrepreneurs tend to get way ahead of themselves in valuation, which risks confusing—and angering—investors. Here’s the problem: It used to be that if I had nothing but a great idea for a company, I might be fortunate enough to find someone who would put up $500,000 (or less) for 50 percent equity. Seeing unicorns in their dreams, today’s young tech entrepreneurs want valuations of $10 million—and often much, much more—just for the idea. Recently, an entrepreneur who believed he was going to conquer the world of energy asked me to invest capital in an idea that he wanted to value at $50 million. It is a big idea to be sure, but $50 million for a company that just six months before had one of the principals invest $150,000 for 33 percent—that seemed a bit off the mark!

In all fairness, one thing I have learned is that the world is not round, by which I mean that not everything is rational and sometimes the pieces don’t easily ...

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