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Kellogg Private Equity Conference

April 7th, 2008 · 3 Comments

Sorry for the delay in posting. My MS keyboard’s “m” key stopped working, making it very difficult for me to write anything from home while my laptop was in dock mode. I performed minor surgery on it this evening and fixed the issue.

Last week I had the pleasure of chairing the Web 2.0 panel at the Kellogg Private Equity Conference. Our panelists included Dan Hosler from Sterling Partners, Matt Moog from, Drew Larsen from SAVO group, and Mark Koulogeorge from MK Capital.  The panel was moderated by Rob Cox from BreakingViews. The panel did a great job of talking about a variety of incredibly interesting topics. My favorite take aways were:

·         Content providers monetizing with ad revenue have a perverse incentive to keep their content less interesting when they are paid per click. Captivating content like facebook has incredibly low click rates.

·         Even destination websites like the New York Times’ have close to 80% of their clicks come from search engines. Content businesses are “an algorithm change away from going out of business”

·         Web 2.0 technologies are finding homes inside of traditional enterprise software packages as they look for more efficient ways to carry out processes. SAVO group is a great example.


After the panel, I had a great conversation with some Kellogg alums about the myths surrounding company valuation. Although all three of us are VCs (and therefore have a self interest in seeing lower valuations), we all sincerely believe that high early valuations hurt companies in the long run. Allow me to explain.

Very few companies can get away with one funding round. Companies often need at least two or three capital injections before they can become capital self sufficient. In that context an overly high valuation hurts a company’s chances at getting the crucial second or third round of capital. That’s because you generally want to see a valuation step up with each round, well if the first round was valued too high for round one, you will have a hard time finding another funder to come in for round two and still be able to give them a decent amount of equity. (“Your high Series A Valuation just priced me out of Series B!”)

The common answer entrepreneurs give for why they want a higher valuation is because they want to protect their equity in the firm. They reason that a higher valuation allows them to keep a greater piece of the firm, so that when there is an exit they get to cash out a lot more. In reality this explanation doesn’t really hold. Without follow –on equity injections there will be no exit because the firm will run out of money.

Some VCs can give excessive valuations to entrepreneurs by coupling the valuation with participating preferred liquidation preference stock. This stock basically guarantees the VC a certain rate of return before the entrepreneur sees a dime out of an exit, essentially defeating the purpose of the higher valuation in the first place. In cases like this it’s just a better idea to stop playing the numbers games and go with the lower valuation.

Tags: Entrepreneurship · Venture Capital

3 responses so far ↓

  • 1 Tim Ramsey // Apr 7, 2008 at 10:43 pm

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

    [WORDPRESS HASHCASH] The poster sent us ’0 which is not a hashcash value.

  • 2 Rich // Apr 8, 2008 at 8:34 am

    Well, plus there’s a little self interest on the VC side for getting the company on the cheap of course.

  • 3 Aziz Gilani // Apr 9, 2008 at 11:12 pm

    Its always a fine balance. If the valuation is too cheap, the company wont get enough capital to get to the next milestone, which of course leaves the VC would no return at all.

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