Recently, there has been a surge in high-quality, relatively low-valuation startups moving into innovation centers across the U.S. Most of these companies are coming from Eastern Europe. This brain-drain is lowering valuations and opportunities for startups across the board. But is this a bad thing?
Here’s the one thing that all immigrant founders get wrong about American investors: VCs have never been particularly good at their jobs, and it’s catching up to them.
I’ll spare you all the mind-numbing industry insights, but it’s worth noting that by some estimates 95% of VC are somewhere between breaking even and downright losing money when adjusted for inflation.
One of the main reasons why VC firms are struggling to turn a profit is their tendency to invest in startups at sky-high valuations. They often follow the herd mentality, jumping on bandwagons and chasing the latest trends without fully considering the long-term viability of the companies they’re investing in.
This is similar to your uncle who bought Bitcoin for $60k because Tom Brady and Kevin O’Leary recommended it. These high valuations and over-commitment to startups have become a serious issue for VC firms, and it’s something that needs urgent attention.
How did we find ourselves here and how can you benefit from it?
Imagine you wanted to start a company with a $1 billion valuation. It may sound difficult, but it’s actually quite simple; you can do it in a weekend. Here are five easy steps:
- Register a company, preferably a Delaware C-Corp
- Create 100 million shares
- Sell 10 shares for $10 a pop to friends and family
- Tweet this: “Exciting news! Our company has just closed an undisclosed funding round and is now valued at $1 billion! Thank you to our investors and amazing team for making this possible. #startup #unicorn #billiondollarclub”
- Sign up to appear at events, judge pitch competitions, author some thought leadership pieces, and become revered as a business guru for bringing a startup from germinating idea to unicorn status in just a weekend. #Greatjobbuddy
If you think I’m joking, think again. Frankly, this hypothetical startup can truly be argued to have a $1 billion valuation. On paper the founder is a billionaire; and without any exaggeration, the truth is that I meet paper billionaires’ regularly.
This issue of unrealistic valuations becomes particularly serious when investors with clouded judgment assign these valuations to private companies. Recent high-profile examples such as Theranos, FTX, and now SVB highlight the severe consequences that can arise when the real value of a company is at odds with its paper valuation.
This is a significant problem, not only for startups who end up neutered by down rounds but also for investors. VC funds that fail to take appropriate markdowns on their holdings in the face of steep drops leave institutional investors with inflated notions of their portfolios’ worth.
It’s a sobering reminder that valuations have an impact.
This brings me to the secret sauce that I teased in the title.
Entrepreneurs in established innovation hubs across the U. S. understand that valuations are largely invented, and that big valuations are not good for anyone. Investors are also generally happy to throw a founder the bone of a larger valuation in exchange for more control over the startups in question. The more sophisticated founders have been known to push back and negotiate lower valuations. I know it seems backwards, but it’s a valid approach to raising money, and you won’t encounter this in many startup ecosystems outside the U.S.
This leads me to my pro-tip for immigrant founders: stop bragging about and fighting for higher valuations. It makes you seem less sophisticated, and it sabotages your ability to raise money.
About the author
Michael Burtov is a serial venture-backed entrepreneur who has grown multiple startups from initial ideas to millions in revenue and venture funding. He has appeared on Shark Tank and his work has been covered in hundreds of major media outlets. He is also the subject of mini-documentaries by Discovery Channel and CNN’s “Great Big Story.” Additionally, Michael has worked with hundreds of high-growth startups to scale and fundraise, directly and through his involvement with leading innovation organizations including Harvard Business School, Harvard Innovation Labs, and the MIT Enterprise Forum. He is also the author of “The Evergreen Startup,” a popular book on early-stage startup fundraising. He holds multiple patents and has received several awards for his work, including the Edison Universe Edison Award, the TIME Magazine Best Inventions Award, The Business Journals Top Inventor Award, Brandeis University Alumni Entrepreneur Award, and the TechCrunch Disrupt Wildcard Award.
