Startups are Risk Bundles

For a more formal treatment of using probabilities to estimate valuations read Douglas Hubbard's How to Measure Anything. It's an eye-opening approach to thinking about things that are hard to measure (like startup valuations).

Hubbard uses elements of information theory to help structure measurement problems. His key insight is that it's worth paying to reduce uncertainty. Most people know this intuitively but resist actually putting numbers to the idea.

Staged funding rounds are a way to reduce uncertainty.

"Valuations are based on what the company might accomplish (potential energy), not what it's actually accomplishing (kinetic energy)"...

I'm not exactly sure why but for some reason this metaphor irks me. Just seems like a stretch, I'd probably be happier leaving the actual physics terms out of a statistics/financial discussion.

Obviously, the number of existing startups matching all those restrictions tend to 0 (zero), mainly when you apply the "hundreds of millions rule".

Everybody will obviously fund any company that matches those restrictions. It can be seen as a tautology.

> Will the team be able to find product-market fit? (What if the CEO is fixated on a specific product idea and wants to build it without getting feedback from potential users?)

If finding product-market fit were only as simple as just getting feedback from potential users. In any case this should probably be the first item in the list. If you have a good product market fit then it will likely solve all these other problems.

after watching "The Big Short", and understanding that a CDO is essentially a risk bundle, this made things way more terrifying to me.

All of this is very well known and written much about in books, blogs, talks, etc. already...