Former Google and Stripe executives just raised $56 million at a $500 million valuation for their new startup, /dev/agents. I never do deals like this. Here’s why…

Returning the Fund

In most venture funds, one investment accounts for the bulk of the returns. The same will probably be true for my angel portfolio, which I think of as a tiny venture fund.

A typical early stage fund might contain 35 names, or separate companies. Since one company will probably provide most of the returns, I want every investment to be able to return the fund.

Think of it like shooting a target. If a bet can’t return the fund, I just wasted a precious bullet.

For an investment to return the fund, it needs to increase by about 70x.

Companies raise more money along the way, diluting the early investors. Investors at pre-seed and seed, the point at which I invest, are usually diluted by around 50% come IPO.

So, to give me 35x and return the fund, I need a 70x increase on that initial investment.

Underwriting /dev/agents

I didn’t have an opportunity to invest in /dev/agents, but I’ve had a shot at many deals like it recently. With the excitement around AI, many startups are raising giant early rounds at eyewatering prices.

So, could I make money investing in /dev/agents? Let’s run the numbers…

At an entry price of $500 million post-money, I need /dev/agents to hit a $35 billion valuation to give me my 70x. Although the founders involved are exceptional, getting to a $35 billion valuation is extremely unlikely.

By my count, there are only 49 US tech companies worth $35 billion or more on the public markets. Just 49 ever, in all of history.

This outcome is so rare that I cannot underwrite to it.

Controlling My Entry Price

So far this year, my average entry price has been $11.6 million post-money. A 70x on that is much easier to underwrite to.

I don’t even need an investment to be a unicorn. $800 million will do me just fine.

Don’t get me wrong, getting to a $800 million valuation is extremely difficult. But it’s a whole lot easier than hitting $35 billion.

And if that little seed stage startup hits a $2.4 billion valuation, I have a nice 3x fund returner. Add in follow-on investments in the most successful companies, and I might get that to a 6x or more.

Wrap-Up

/dev/agents may become a fantastic company, but it’s unlikely to be a good investment.

This is no reflection on the founders, and I wish them all the best. Moreover, /dev/agents is hardly alone in raising its first round at a sky high price.

So, why do VC’s make investments like this?

They may just want a shiny logo for their website. Saying they’re in X hot deal makes them look smart, like they’re insiders.

Me, I don’t play that game. If an investment can’t make money, I’m out.

What do you think of the /dev/agents raise?

Have a great weekend, everyone!

More on tech:

Why It’s Easier to Raise $3 Million Than $300,000

Benchmarks for Valuation and Traction at Y Combinator

Small Investors Lead to Big Investors

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