How Jason Calacanis Values Startups (and Why I Disagree)

As I was winding down last night, I was scrolling through my Twitter feed digesting all of the interesting nuggets that people I follow were sharing.  Only on Twitter can I find great, insightful posts about product development sandwiched between a classic picture from You Had One Job and a selfie from my sister-in-law.

One tweet led me to a recent post that Jason Calacanis made on his blog.  He’s been writing a lot more lately, to the benefit of the greater startup community.

The topic:  How a founder new to Silicon Valley can value their startup.  Yes!  This was exactly the type of post that I wish more people wrote about.  Unfortunately, it wasn’t what I had hoped.

As much as I love Jason for all of the time he’s put into developing content that helps entrepreneurs — from This Week in Startups to his own writing on Calacanis.com — I didn’t feel that the major point he was driving home was actually that helpful.  At least, not to the founders that were either new to Silicon Valley or outside of Silicon Valley altogether — the exact type of founders I believed he was targeting.

Don’t get me wrong.  I’m not trying to “hate.”  But when you read the post (and I encourage you to do so), you’ll notice that he encourages founders to approach valuing their startup in three stages.  I thought I’d dissect those stages that he references, and add my own perspective — which I hope can be helpful to those that are outside of (or possibly new to) Silicon Valley:

STAGE ONE: $1M (REAL) FRIENDS & FAMILY

Jason’s suggestion:  Find friends and family that believe in you, and offer them 5% of your company in exchange for $50,000 so you can quit your job, hire a designer and build a prototype.  In effect, you’re initially valuing your startup at $1,000,000 (post-money).

There actually isn’t anything wrong with this.  In fact, I think it’s an interesting approach to keeping things super-simple and creating a small “pre-seed” round for the very first people to put money in your business.

STAGE TWO: $2M INFLUENCER ROUND

Jason’s suggestion:  Raise another $200,000 to finish your product and do an alpha/beta test from name-brand investors (he calls them “Triple N’s” — people with a strong names, networks, and knowledge), and allow them to invest at a “juicy valuation” of $2 Million.

This is where things go off the rails a bit.  I’ll be the first to admit, I’d love to be able to raise funding from Chris Sacca, Gary Vaynerchuk, Kevin Rose, and even Jason himself.  But telling people new to Silicon Valley to entice these pseudo-celebrity investors simply by “giving them a juicy valuation” isn’t helpful.  Do I believe that they could be transformative investors to add?  Of course.  But let’s be real.  These people are very hard to get to.  I absolutely agree that founders anywhere should do their best to build their network — and I’ve seen first-hand how it’s not impossible to get the attention of some of these super-angels.  But most founders should be so lucky to get five minutes of these investors’ time.  Let’s not assume they’re a box to check off for everybody.

Instead of focusing exclusively on name-brand “super-angels”, founders should not be adverse to uncovering some rocks and finding investors at this stage that aren’t necessarily celebrities, but have a ton of value to add for their specific business.  Are you developing a social game around Facebook as a platform?  Mike Sego could be your “Gary Vaynerchuk.”  Are you building an app built around promoting events?  Kevin Hartz could be your “Cyan Banister.”  Again, it’s not that these super-angels wouldn’t help you — but don’t focus on celebrities.  Focus on investors that are directly relevant to your business.

STAGE THREE: $4-6M ANGEL ROUND

Jason’s suggestion:  After building an MVP with your “Stage Two” round, it’s time to raise another $1M – $2M in funding at a valuation of $4M – $6M from micro-VC’s who are “happy to write a $500,000 check for 10% of the business” if you have some amount of product-market-fit or a slick product they could play with.  If you’re outside of the valley?  Then decrease the valuation (of this round and each of the previous rounds) by 10-30%.

I can tell you with certainty that a startup founder will not raise seed funding at a valuation of $2.8M – $4.2M in Cleveland when they just have an MVP in place.  Could they convince a Silicon Valley investor to pay this?  Jason would know better than me.  But founders should realize that their local market may expect a discount that’s an order of magnitude of 2x (or more!).  It’s certainly the case in a place like Cleveland.

I will say this, though:

Jason’s post is an interesting way to think about raising seed capital.  Rather than consider raising one “seed round”, why couldn’t it be done in multiple stages?  Plus, the other “interesting notes” that he shares about the strategy later on are actually pretty useful.  For instance, it’s true that it’s unfair to only consider the cash that a (reputable) accelerator puts in as the value they’re delivering.  And yes, crowdfunding platforms like Kickstarter may allow a startup to bypass the “friends and family” round.

At the end of the day, I still think Jason is awesome.  He’s certainly been around the block more times than me — and has the unique perspective of being an entrepreneur and investor.  His podcasts and writing always has some sort of value.  I just think in this particular case, it’s not quite in touch with the majority of founders that are brand new or outside of Silicon Valley.

UPDATE (2/7/15):

This post got some great discussions going on Facebook and Twitter. Thanks to those who participated! Throughout the discussion, others were kind enough to point out that Jason’s point was actually spot-on — which is that an influential investor (the Triple N…. or really NNK) adds huge, huge value. So much, that they can actually increase the valuation of your company. And it’s true. While Jason pointed out household names like Gary Vaynerchuk and Chris Sacca, I took it to mean “famous investors.” They are. But influential investors don’t have to be “famous.”

I pointed out in my post that Kevin Hartz would be a great value-add investor. Apparently, Jason agreed.

But he also believes I made his point for him. And I guess I did. But I still believe that while it’s not impossible, most people that are brand new to SV feel like they should be so lucky to find a way to even get to pitch Chris Sacca or Gary Vaynerchuk (or Jason Calacanis, for that matter). Jason’s post doesn’t really acknowledge the fact that these people are the hardest of the hard to get a hold of. And I don’t think it’s necessary to get fixated on finding a famous investor.

Jason did give me one more piece of advice… to get the hell out of Cleveland (and come to Silicon Valley).

I appreciate the invitation, and I’ll be back often to visit. But for now, I’ll stay “outside of the valley.”

 

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