Why Startups Should Take Lower Valuations
It’s not uncommon for startups to receive runaway valuations in today’s venture capital environment. Hot money streaming from all around the world are eager to find the next unicorn investment. First-time entrepreneurs, especially, are at the mercy of being lulled into a starry atmosphere studded with so much cash that they don’t know what to do with it all. And that’s a problem.
Venture Capital Herd Mentality
FOMO — fear of missing out — has never been more acutely exhibited by a group of adults, unless you’re counting those eager-beaver college freshman who sign up for every club under the sun. Venture capitalists are among the worst offenders of herd mentality. Too often, a VC firm would initially turn down funding a startup, only to flip-flop back into investing once it hears another peer fund has poured some substantial cash into the venture.
Over-indexing on Signaling
The problem with this is two-fold. First, it demonstrates that VC firms actually do not know whether they are making a good investment or not. Think about it. It’s like a dating ritual. The girl or guy with a bunch of pursuers appears much more appealing, when in fact, she or he may not have much going for her or him to boot. On the other side, a great gal or guy might find her or himself all alone in the wind, simply because a few first dates didn’t…
