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Comment by itsoktocry | Hacker News Reader

>our lead was happy to raise the valuation so we could take more money and increase our odds of success.

VC is such a strange world.

"Valuation" is a measure of the fair-value of an asset. How can a lead investor decide "to raise the valuation"? Why would anyone looking to invest base the valuation on people who already have money in, rather than their own due diligence? Why wouldn't the optimal valuation be as high as possible?

This game is kind of confusing.

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Because in a startup, valuation is generally calculated by the investor rounds rather than revenue.

An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

They wouldn't generally want to boost valuation for their round because that reduces their return. But there is probably some wisdom in hyping up valuations to get customers and future potential investors excited.

Additionally, if it is a follow-up round, they probably want to invest at a higher valuation just for their own investor confidence. No one wants to have a "down round" because it throws cold water on the hype train for all the other investors.

>An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

That's the confusing part, and it seems backwards. The valuation should determine how much money you are willing to put in for a specific ownership share. It should be an input, not an output.

As PG recently shared, when an investor puts money into a company it is a calculated bet that the company is actually worth _more_ than the valuation they are investing at. No one invests $1 for a 10% chance of making $10. So if the valuation goes up, it basically eats into an investors expected “profits”.

While I am not going to argue that valuations are wholly rational (and specifically the fact that valuations increase with investment size), it is also true that having more capital may make the company able to accomplish more, and thus raise the expected exit value for the investor. If so, that provides a rational basis for increasing the valuation of the company when giving it more capital. (Present valuation being the discounted future valuation)

I would also add that having more/too much capital may also be the downfall of many companies.

The valuation is established by the person writing the check. It’s based on their perceptions of the market and how the team is tackling it. VCs don’t really care about dividends, they care about exits. They are trying to buy part of a startup for less than they can sell it to a buyer or the markets. The financial capacity of potential acquirers and their relative need for the startup’s business drives what that check writer is willing to pay. IE the market for a startup’s equity is the input, and the valuation is the output.

Outcomes are roughly binary though

It's a bit confusing but does make sense. Imagine wanting to buy 20% (or 100%) of Apple in the public markets. If you try in normal trading it will either take months based on trading volume or you'll bid up the price as you're buying.

People looking to own larger pieces of a business are often willing to pay a premium to folks trying to buy smaller pieces.

The game is called financial engineering and it's how most SV startups actually generate an eventual exit/profit for the investors.

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