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What Most People Don’t Understand About How Startup Companies Are Valued

There is much discussion online, and also in small, private groups, about why the prices of technology companies–public and private–are falling. Valuing any company can be difficult, because it requires a degree of forecasting future growth and competition and ultimately the profits of the organization.

And there have been two big changes that are widely known–in the past quarter, the value of some very high profile companies, such as LinkedIn and Twitter, have fallen substantially, plus Fidelity (usually a public market investor) has written down the value of many of its later-stage private-company investments and made the downward valuations known.

Most venture capitalists who have been in this business for a long time foresaw this correction and have been talking about it privately for the better part of the past year or two. I’d like to explain as best I can my opinion on what is going on, because most of what I hear from entrepreneurs is not only wrong but is reminiscent of what I heard from 1997 to 2000.

I recently surveyed more than 150 VC friends from all stages and geographies about their thoughts on the market by asking, “Which of the following statements best describes your mood heading into 2016?” You can see that the balance of caution versus optimism is 82 percent to 18 percent.

Put simply, it’s really hard to build a strong company when all of your competitors are giving away free sh-t fueled by venture capital chasing winner-take-all returns.

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