In an earlier blog I described the traditional way to value a company.
Paul Graham of Y Combinator, attempts to value a company based on “equity vs. investor added value” using mathematical equations, essentially an ROI model:
There is a third model which is often unspoken, and the only true measure: Your company is worth what you can get for it.
No startup is worth £1M, ever. However if you can get investment based on this valuation, then it is and I and my fellow experienced investors are wrong.
This is the same reason why this house is worth £280M when it really isn’t.
Of course if you’re an oligarch and money is no object, then the house valuation if fine, but if you’re an investor competing with inexperienced investors that are prepared to put ultra high valuations on startups, then this damages the whole eco system and creates over inflation and ultimately a boom and bust economy.
The advice I want to give is that if you are a startup and you think you can get £1M, you probably won’t. However, you might, and in the short term that would be fantastic for you. In the long term, it damages the market and creates hyper inflation, so I want to advise you not to accept money based on that valuation, but I know you won’t and can’t listen to that advice.
For the same reason an oligarch buying a £280M house that is probably only worth £28M is a bad thing in the long term, but once again, if you can afford it and want to buy it, why wouldn’t you.