Valuations, Capital Amounts, and Sideline Money

I have now seen several cases of companies I have previously passed on due to valuation coming back and want to revisit financing with us. What is odd about this is that they claim they have millions on the sideline waiting to put in and just need a lead investor.

I see that founders are taking the amount they get in verbal commitments today and back that number into 20% dilution to come up with their target post-money valuation. This valuation method doesn’t work for me because generally, that post-money is too high for the numbers they plan to get to within the next 12 months. I am taking a risk today for a valuation I can get 12 months from now. The asymmetric risk and return aren’t there.

It would be safe to assume that if the founder takes more capital, the company will grow into a more significant number. That theory makes sense, but it rarely happens in the early stage. They usually blow it. The problem is the founder doesn’t have the layers of infrastructure to spend that money appropriately. They try to take on too many markets or go to market motions. The result is wasted capital.

I guess this is another stage of levels of acceptance in the changing world order. (Bargaining?!)