“Appealing to the Deity of Appraisal: A Revelation from the Last Seven Years” by Mark Suster.

The Rise of the Valuation God: A Look Back on the Startup and Venture Capital Industry

The Early Years: Programming for Joy

In 1991, startups barely existed, and there was no money train. Despite the lack of funding, programmers found joy in problem-solving and seeing their creations come to life. However, the late 90s brought in a new era of valuation obsession with public markets and artificial valuations. The beginning of the WWW and the first Internet businesses created a golden period where anything seemed possible, and people were building, wanting to solve new problems and see their creations come to life.

From Building to Valuation Obsession

By the late 90s, money had swept into town, and public markets, instant wealth, and sky-rocketing valuations became the norm based on no reasonable metrics. This era saw the birth of the “new economy” with a belief that “old rules didn’t apply.” The focus shifted to artificial valuations, easy money, and quick wealth. This obsession with valuation took a lot of joy out of the industry, and the industry seemed to drift away from its core mission.

The Building Years of 2001-2007

The dot-com bubble had burst, and unrealistic valuations, ridiculous cost structures, and nascent revenues characterized the industry. However, during this period, the focus shifted from valuations to building. Startups became focused on building great, sustainable, and revenue-generating companies while holding costs in check. However, the industry remained difficult to crack, and raising capital remained a challenge.

The Dead Years of 2007-2008

The Global Financial Crisis (GFC) hit, and the market evaporated. Almost no financings took place, portfolios crashed, and VCs and tech startups struggled to survive. In retrospect, this time was a blessing for new VCs as they had the freedom to figure out where they wanted to make their mark without the added pressure.

VC Side of the Table

As a VC between 2009-2015, the focus was working with entrepreneurs on business problems and marveling at the technology they had built. The industry was in it for building great & sustainable companies, and valuations were tied to underlying performance metrics. Startups wanted to solve new problems and grow revenue year-over-year. Difficulties in raising capital persisted, but it remained possible.

The Rise of the Unicorn – a Paradoxical Era

In 2013, Aileen Lee of Cowboy Ventures coined the term Unicorn to represent the rarity of a billion-dollar valuation. By 2015, Unicorn became synonymous with the latest phase in the industry, with some companies reaching $10 billion or more, sparking a culture of instant wealth, valuations for valuations sake, and the growth at all costs mentality. Easy money, all sources of capital, hedge funds, cross-over funds, mutual funds, and family offices propelled valuations up, and companies began to focus on chasing valuation validation instead of growing revenue and building great company cultures.

The Hangover and the Search for Sober Equilibrium

The valuation party continued into 2021 when the hangover became inevitable, with signs of sobriety emerging only recently. The industry is searching for a new equilibrium, with new startups emerging that never had access to the Kool-Aid. However, LPs and VCs continue to focus on the valuation God as benchmark performance metrics emphasize up and to the right or perish.

Conclusion

The rise of the valuation God has taken the joy out of the industry, but signs of sober equilibrium seem to be emerging. New startups are emerging focused on building great, sustainable companies with realistic valuations tied to underlying performance metrics. However, the industry remains challenging, with the focus still on valuations rather than building and growing revenue. The industry needs to shift its focus back to the core mission of building great companies and solving new problems, with valuations as a by-product of growth and success rather than an end in themselves.