![handle is hein.journals/hblro5 and id is 1 raw text is:
VENTURENOMICS: ADJUSTING FOR THREE STANDARD PRACTICES MAY
REDUCE VENTURE-BACKED COMPANY PRE-MONEY VALUATIONS BY
90%
Jeff Thomas*
I. Introduction
Vic is trying to buy some of your pizza. He says, I'll give you $3 for three of the
ten slices. His $1 a slice offer infers your entire pizza is worth $10 in its current state.
But, what if your pizza really has just eight slices instead of ten? Further, what if the five
slices Vic is not buying are inedible until you complete a substantial amount of additional
work? Specifically, what if those five remaining slices are currently only 25% complete
because they lack toppings and still need to be cooked (even though Vic's three slices are
full of toppings and ready to eat)? Finally, what if each of Vic's three slices comes with a
free beer while the other five slices do not? It would seem absurd if people knew these
conditions existed and yet still valued your pizza, today, at $10 simply because of Vic's
$1 per slice offer. If Vic is paying $3 for three edible slices with beer, the five remaining
(and currently inedible) slices with no beer must be worth less than $1 per slice and the
whole eight-slice pizza, in its current state, is certainly worth much less than $10.
Recent valuations attributed to venture-backed companies are shocking. For
example, in 2013, the median pre-money valuation1 of a company raising its first round
of venture capital (or, its Series A round)2 was reported at $9.4 million.3 Some
* Jeff Thomas is the Chair of the School of Business at Johnson & Wales University in Charlotte, NC.
He also serves on the Board of Directors of Queen City Forward, an accelerator for social ventures. He
has extensive experience in counseling entrepreneurial ventures through law firms and law school clinics
in Chicago and Silicon Valley.
1 A pre-money valuation is the value of a company prior to the round of the investment. See infra
Section II.
2 See, e.g., Explanation of Certain Terms Used in Venture Financing Terms Survey, FENWICK & WEST
LLP (Oct. 4, 2013), http://www.fenwick.com/publications/pages/explanation-of-certain-terms-used-in-
venture-financing-terms-survey.aspx (defining Series' of Preferred Stock as [w]hen a company raises
venture capital . . . [t]he shares sold in the first financing are usually designated 'Series A,' the second
'Series B', the third 'Series C' and so forth).](ViewImageLocal?handle=hein.journals/hblro5&div=1&collection=&method=preview&ext=.png&size=3)
What Is HeinOnline?
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most