$13 million — that’s my median entry price this year. In the hottest market ever, I’m watching valuations carefully. Here’s why…

Behind the Scenes In My Portfolio

First, let’s take a peak inside my portfolio and see what I’ve been paying, year by year:

These deals are almost all seed and pre-seed stage. They typically have between $200,000 and $500,000 ARR.

What stands out most to me is how consistent my entry price is. 

It rises and falls slightly from year to year but stays somewhere a little over $10 million. The price is even more consistent when you adjust for inflation. $10 million in 2021 is around $12 million today. 

The Risks of a Hot Market

We’re seeing some amazing companies created now. But a market this hot also has huge risks.

It’s easy to get swept up in the mania. To justify paying any price.

If it’s Uber, it won’t matter right?

Many people have parachuted into venture capital with that mindset. Over and over, they blow themselves up.

SoftBank Vision Fund, Tiger, the list is longer than your arm.

Trees don’t grow to the moon. We cannot invest at any price and still make money.

How I Know If a Valuation Makes Sense

In order to justify investing in a start-up, an enormous exit has to be possible.

In most venture funds, nearly all the gains come from one company. To justify investing in startups with the risks and illiquidity, you need at least a 4x fund in 10 years (15% IRR). 

A typical early-stage fund might contain 35 companies. To hit 4x, you need one of those companies to grow 280-fold (35 companies * 4 * 50% dilution). If it’s a syndicate deal with fees, you need an even bigger return, around 370-fold. 

So I ask myself: in the best-case scenario, could this company be a 280x?

Trees Don’t Grow to the Moon

Say we’re looking at a deal at a $13 million pre-money valuation, my median entry price for this year. Perhaps they’re raising $2 million. 

I have to believe that this company can exit at $4.2 billion (280 * 15 million). That’s difficult, but doable.

Now, what if it’s a hot deal raising at $35M? I have to believe the company can reach $9.8 billion.

There just aren’t a lot of $10B startups. Maybe I get lucky and hit one, but I don’t want to depend on it.

Making Exceptions

Entry price is very important. But at the same time, great startups sometimes go for a premium.

I don’t want to lock myself out of a fantastic deal. That’s why I focus on median entry price, not average.

This allows for the occasional outlier. 

Let’s say you get an opportunity to invest in Travis Kalanick’s next company. It’s not going to come cheap.

I still want to do that deal. I’d balance it with other, more reasonably priced deals in less well known founders.

Wrap-Up 

In a market like today’s, it’s easy to get sloppy.

$35 million for a pre-revenue company? Sure, why not! 

Fill a portfolio full of those hot deals, and 10 years from now you’re in for a rude awakening. 

Most won’t perform. And even when you hit a big winner, your entry price is so high that you don’t make much money. 

That’s why I’m scrutinizing valuations closer than ever. Even in a world transformed by AI, price still matters.

More on tech:

Meet My Latest Investment: Verustruct

My New Investment Strategy

How to Get Started Angel Investing

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.