Dave McClure on why seed-stage startup valuations have been increasing

price-insensitivity by 2 types of investors:

newly-minted / n00b angel investors, who have more money than experience, and/or are in it primary for fame more than fortune… in my first few years after leaving PayPal, I was in this category. while I did have tech expertise, I had limited knowledge of startup pricing, legal structure, or terms, and limited ability to change or negotiate much anyway. many current and ex- Facebook, Google, Twitter, LinkedIn, & Zynga folks fall in this category. they are eager to get in the game, and are probably not doing it as much for returns as for cool / fun factor. same applies to non-valley investors who want to get in on big-name valley deals. (or angels from less-active regions looking at more-active regions).

I completely agree.

I definitely qualify as a n00b investor. But I’m not doing it for fame. I’m doing it to help other startups and give back to the community. And to make money.

My rules for investing:

  1. I only invest in products I use myself. Heavily biased towards consumer and mobile.
  2. I only invest when the deal makes sense. I won’t over pay for an investment.
  3. I won’t ask for advisor shares. A company can offer them if they see value in my help.

I’ve passed on many companies that I love and I think have a good shot at being successful. The deals just didn’t make sense for me. Investing in early stage startups is very risky.

Early stage startups raising rounds at high valuations are losing investments from super helpful, super active angels/super angels like Dave McClure. That’s unfortunate.

Sometimes companies are giving angels advisor shares in order to offset the high price of the round. That’s one way to get around the price issue.

But another way is to stop raising rounds at crazy valuations. The price of your round matters much less than who is in it and what value they add outside of the money. Experience counts for a lot.

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