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Hello from the blisteringly cold East Coast of the United States, where I am eating doughnuts to ward off the effects of my COVID-19 vaccine booster shot. Thus far the third dose of Moderna is not as bad as the second, but who knows what is coming. So we’ll stay brief today in case I fall out of my desk chair and straight into a nap midkeystroke.
To start, thank you. This little weekend newsletter now has comfortably over 30,000 subscribers, and an open rate that sits in the mid- to high-40s each week. It’s part of a larger project I kicked off at TechCrunch when I came back but was far from a settled question when we added the newsletter to the regular Exchange columns.
Frankly, I figured it was a coin flip if it would get an audience. The bet wound up paying out, and because of you, The Exchange now publishes six times weekly. That’s just good fun. Thank you.
Now, risk! A little while back we chatted through the point that risks from the startup market are slipping more frequently into the public markets. This meant that the regular investor can now get their hands on more nascent, higher-priced startup equity than before thanks to SPACs and some, well, interesting public offerings.
But inside that point was the implicit argument that startup risk is also rising for its private market backers. Let’s talk about what is going on:
Startup valuations are rising thanks to ample capital availability, limited investments with strong yield and related issues. You’ve heard this bit before.
Startup valuations are also rising thanks to more investors going earlier in the investing process. Again, you’ve heard this before. But you may not be aware of how it’s a self-reinforcing issue. Large funds can invest a stage “earlier” than they might given the size of their funds, essentially taking out an option contract on a larger purchase of shares in the startup in question without risking their overall returns profile. This pushes later-stage money, generally, earlier. And valuations rise as later-stage investors are less price-sensitive to early-stage valuations thanks to a dollar differential. More simply, if you have $1 billion to invest and you put $5 million into a Series A, you don’t care that much if it’s at a $65 million pre-money valuation or a $75 million pre-money valuation. What you do care about is putting $50 million more into winners when they raise their next round.
