Fred Wilson: Valuation Traps

There is a long article about square and box at the TC this weekend. I am not interested in the author's views on the commercialization of these two products. But the author's view of the last "valuation trap" I agree with:

The second iron law of start-ups is likely to be: the higher the valuations, the less the options for financing or exit ... Once the company melts into mezzanine capital and is valued at $1 billion trillion, it basically has the option of listing or finding a gold master who is very interested in itself. There is no other choice.

The last 3 months have been a bad thing for the tech stocks that have been high up, and now we've seen some IPOs being postponed. Square and box have been doing this lately.

Another common denominator between square and box is that the rate of burning money is very high. The author of the article said that square burned 100 million dollars in 2013, while box burned 160 million dollars.

Sky-high valuations and equally high rates of burning, coupled with disappointing IPO markets, are not comfortable. I am quite confident that square and box have the ability to circumvent the valuation trap, but it will take a hard choice in the months ahead.

I mean, you can push up valuations when investors come to the door, but unless your cash flow is positive and you can keep it that way for the foreseeable future, you're risking yourself. After a while you have to find someone to push the price up so that people may not find it.

Conclusion: I am a VC, here to talk about my book. I don't like to pay for sky-high valuations. I'm going to argue. So you have to understand this in this context. But I am also an investor in companies that have (or may or will) find themselves trapped in valuations. I have encountered and felt this and have been involved. This is a real problem.