![]() "I think later stage investors are analyzing growth rates and size and using Facebook (and other public stocks) as a comp on valuation," one industry insider says. And sometimes aggressive valuations can backfire. Some of the valuations are the result of hype though. They're rumored to be taking much more than that off the next round of financing - whenever that officially closes. Snapchat's co-founders, for example, reportedly pocketed $10 million each during their last round of financing. Eliminating the financial lure of an acquisition keeps entrepreneurs focused on building longer-term businesses. Founders are able to take a few million dollars off the table and become instantly rich, just like they would if they sold the company. To prevent startups from getting acquired early, some investors let founders pocket cash during fundraises. Investors put money in Instagram at a $500 million valuation, for example, probably didn't anticipate the company selling for a smaller, 2X multiple. They're after home runs, so it's in their best interest to keep promising startups private and flip them later for higher returns. It's also important to remember that investors don't want marginal wins. Even if a startup goes to zero, preferred stock holders get their money back first - if there is any left - while a founder with common stock might lose everything. If a startup's valuation increases, both preferred stock investors and the founders win big. Even if it gets bought for less than its official valuation, the preferred stock still gets bought out in full - sometimes at a premium or multiple. That means their investments are much less risky. It's important to note that a lot of high-valuation deals give investors preferred stock, not common stock. When late-stage VCs stumble upon a startup that's could become a category leader, they're willing to throw tons of cash at it. Why have valuations gotten so much higher in recent months?įirst, there's a lot of private money out there, and investors need to invest in something. Today, Spotify joined the $4 billion club. Dropbox doubled the magic $4 billion figure and is raising at an $8 billion+ valuation. Evernote hasn't raised a round in over a year, but it's likely near the $3 – 4 billion valuation range by now. A few weeks ago, Snapchat was mulling over a new round at a similar valuation. Pinterest raised at a $3.8 valuation in October. Uber received a $3 – 4 billion valuation in August when it raised a $258 million round of financing led by Google Ventures. R ecent valuations have dwarfed Tumblr and Instagram's once-massive $1 billion buyouts. ![]() That sounds high, but $4 billion seems to be the magic number for today's biggest startups. Music streaming company Spotify just raised $250 million at a $4 billion valuation.
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