USV sat out the last round, so it’s not surprising it sat this one out too. Another reason it’s not participating is fund size restrictions.
But it seems another part of the reason is the valuation is too high.
At least, that’s what we’re guessing after reading a post from Fred Wilson this morning at A VC.
Wilson writes, “instead of being ownership focused, I prefer to be valuation focused.”
That means he’s not looking to own a certain amount of the company, he just wants his piece at the right price.
It appears $3.7 billion is not the right price for USV to invest in Twitter. If it wanted to protect the size of its investment, it would have had to put in a lot of money. Putting the money towards Twitter means missing out on new investments.
UPDATE: In the comments below, Wilson says:
“i don’t write blog posts describing why we do or don’t make follow on investments
that post had nothing to do with Twitter and everything to do with why we are not winning many new deals these days”
Here’s Wilson’s whole post:
One thing I’ve seen many VCs do wiith their initial investment in a company is invest more when the valuation gets expensive. They are ownership driven, not valuation driven. So if they originally wanted to invest $4mm at a $20mm post money valuation and buy 20% of the company, they talk themselves into investing $8mm at a $40mm post money valuation so they can still buy 20% of the company.
I have never liked this approach. When the price of an initial investment goes up, I prefer to invest less, or nothing at all. Investing nothing at all is a fairly obvious approach when the price gets beyond your comfort zone. Investing less is not as obvious.
My rationale for investing less has to do with the fact that most venture investments involve multiple rounds. If you believe there will be additional opportunities to invest in the company and you really want to be involved, then you can invest less and reserve more funds to invest later in hopes that the risk reward of the investment improves. Since you will be an investor in the company, you will be shown those opportunities before or at least alongside new investors in future rounds.
Investing more when the price is too high makes no sense to me. If you are overpaying by 2x, doubling down feels like overpaying by 4x.
I think the root of this “doubling down on the overpay” issue is that many VCs manage large funds of other people’s money and they really don’t care so much about how much they invest in each deal. They are looking to buy large stakes in companies and hope that one or more turns into a big winner.
I try to invest as if I have a fixed amount of capital and it is my own capital (some of it is). I like to think that every investment we make takes funds away from other investments we can make, even though this is not actually true. Our firm could raise more money if we wanted it and needed it. But I think raising larger funds will ultimately lower the returns we can deliver to our investors and we have resisted doing that.
So instead of being ownership focused, I prefer to be valuation focused. And the key figure I look at is average valuation of our entire investment. We take the total amount of capital we have invested in a company and divide it by our total ownership. We like that number to be as low as possible relative to the current value of the business. I believe that is the recipe for the best returns and that is what we seek to deliver to our investors.
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