Aug 19, 2015 ยท 4 minutes

As reported earlier on Pando, VCs are thinking one thing and doing another right now.

They are seemingly very concerned about burn rates and sky high valuations, so much that a recent survey of investor sentiment showed that VCs “faith” in the health of their industry is sliding due to worries of inflated valuations. But -- yunno-- they keep funding companies who throw cash around to acquire new customers in unsustainable ways at high prices anyway.

Don’t hate the player… etc. It’s a trend I dubbed being “worried all the way to the bank.”

One humorous sign of this disconnect and desire to somehow resolve it came from the Twitter stream of Greylock’s Josh Elman today:

A couple things.

First, you can see where wayward entrepreneurs would make such a mistake. The fact, for one, that it’s the same root word. And the verb tense when talking about a valuation is “we’re valued at…” And that financial dictionaries define “valuation” as “a determination of the value of a company’s stock based on earnings and the market value of assets.”

But to be fair to Elman, he appears to have been making a more esoteric point. In an earlier tweet he noted that valuation is “risk adjusted expected value of long term cashflows back to investors” while value is “the impact companies provide in the world.”

That’s a mouthful of a point. But from it I take that he’s drawing a distinction between the greater human value of an entrepreneurial journey to your negotiated “valuation.” What you are worth, versus bragging about some stupid unicorn price.

Not a bad point to make in these times. The entrepreneur’s journey is supposed to be about something more noble. We are getting precipitously close to that whole late 1990s thing where people bragged about their paper wealth as if it were real. Feeling they are invincible because of how quickly they’ve added some speculative zeros to an “arbitrary as fuck” number.

The problem is that this newly offered definition of valuation: “risk adjusted expected value of long term cashflows back to investors” isn’t particularly right either. What I liked about Elman’s simpler phrased Tweet is that venture valuations aren’t statements of a company’s current worth. They never have been. That’s what’s so idiotic about mainstream media articles that every once in awhile scream “OMG (FILL IN THE BLANK STARTUP) IS WORTH MORE THAN WALMART!”

Private deals are functions of when you can get into a deal and at what price. In the deals with the most extreme prices there is a zero sum competitive dynamic that drives the price up more. The “valuation” of a private company is more like a house on the market. There can only be one buyer. Public company stocks-- where earnings are (comparatively) predictable and sellers can sell at will and buyers can buy at will-- are fundamentally different. As are the valuations of the two.

We all know startup valuations don’t remotely equate to what a private company is currently worth. (Trust me, ours doesn’t in the slightest.) But nor are they some risk-adjusted calculation. They reflect what you have to pay to get in.

Still, the contortions VCs are making about what a “valuation” is only telegraphs this growing uncertainty with the prices they all keep paying.

Elman’s colleague at Greylock, Reid Hoffman recently offered his own explanation of why more than hundred unicorns have been created in recent years, an unsustainable amount if you look at historical venture and IPO numbers.

He explains why current market conditions have lead to the ontological head-fuck of a “herd of unicorns.”

From the piece:

VC firms and other investors are betting on technology, not metaphors.  

In 2003, the iPhone didn't exist. Facebook didn't exist. There were just 800 million global internet users. Since then, we've shifted into what I call the Networked Age – an era defined by unprecedented global connectivity and the massive new opportunities that creates.

Today, there are 3 billion global Internet users – and counting. With tablets and smartphones, they use the Internet far more often, in far more places than they did just ten years ago. Thanks to the rise of social and professional networks, these users are also far more tightly connected than they were in 2003. 

Also, not a bad point either. But from what I hear, VCs aren’t betting so much on “technology” as momentum, and a need to stay in the game. Hence the disconnect between what they are doing and what they are saying.

Hoffman and fellow Greylock partner David Sze are our guests for PandoMonthly tomorrow (Thursday, August 20th). Expect the debate to continue then.

(There are about ten tickets left here, as a reminder, members can attend or watch the livestream for free!)