In "Silicon Valley TV Series" (in first episode of the second season) a bunch of guys, designed a new algorithm, and asked big companies to invest in that project and value their product.

At a certain time in the episode, they realized that instead of negotiating with companies for higher investment and higher valuation, they must somehow negotiate for the lowest possible valuation as they are new to the market, otherwise they will be bankrupt.

I can't figure out the reason!

In a simple language (as I know nothing about economy) can anyone explain it?

  • $\begingroup$ @EnergyNumbers The same user answered both. I believe the answer here is more complete than the answer there, so I think that the other question should be marked as duplicate. They certainly are the same. $\endgroup$ – Alecos Papadopoulos Jul 20 '15 at 12:03

Each startup typically attracts multiple investors, each having its own evaluation of the company. Investors participate in funding series, when equity is sold at the same per-share price. Otherwise, it's difficult to explain an investor why he paid more for the startup than others did.

When a startup finds investors who buy their stakes at high evaluation, the startup cuts off more reasonable investors. And reputable VC funds don't like overpaying.

So, the startup ends with some silly investors holding their equity, while unable to find more money at comparable prices.

In the end, founders are better off while targeting realistic evaluation, not milking a single naive investor.


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