European Ventue Capital valuations: Value or growth investing?

Venture Capital valuations are a thorny issue.

In an earlier post I pointed out an investor’s comment about European entrepreneurs being relatively unsophisticated when it came to getting a good valuation.

Once again I was interested to hear another recent outburst from a large well respected Euroepean early stage VC. His word were “we‘ve made 9 pre revenue investments over the last 24 months. They are high quality companies and we’ve had no competition on any of those deals.  Early stage VC is still cheap.”

I thought that VC was all about growth.  Have I missed the point? 

Maybe the thing that makes venture capital an attractive asset class is that it operates in the greyest part of the market.  Not grey because it is underhand or corrupt.  But grey because it is inefficient: because entry valuations CAN be cheap. Because it is easier to follow a path of value investing rather than growth investing.

Well maybe for some investors.  But did Index Ventures get into Skype cheap?  No. Did SEP get into CSR on the cheap? No.

Did Accel, Benchmark or Atlas get into Icera on the cheap?  No. Amadeus?  Certainly not.

Of course it would be stupid for any investor to pay too much.  If Index only had got 1% of Skype then it would have made no dent whatsoever in their IRR.  But bragging how cheaply you can into deals?  Not sure it helps any of us.

NB. Just after I wrote this I went for drinks with a bunch of investors.  One partner at a tier one and half fund told me that he is delighted with competitive deals and efficient market: he is confident that his firm can differentiate themselves as sufficiently value add to not have to pay top whack. And I didn’t even prompt him!

Comments

[Fred Destin]

hi paul this is an interesting post; i am mulling a follow up. Please note that Benchmark and Atlas seed funded Icera, so the valuation was quite low. Accel followed, then Amadeus and finally 3i, with significant step-ups in value. Also note that no one knows whether this is a company worth paying up for as it has not exited :-)