The Importance of Investor Signaling in Venture Pricing

Pricing in any market is a function of the information available to investors. In the public stock markets, for example, the primary information inputs are “hard metrics” like company financials, industry dynamics, and general economic conditions. What makes venture pricing special is that there are so few hard metrics to rely on, hence one of the primary valuation inputs is what other investors think about the company. This investor signaling has a huge effect on venture financing dynamics. If Sequoia wants to invest, so will every other investor. If Sequoia gave you seed money before but now doesn’t want to follow on, you’re probably dead. Smart entrepreneurs manage the investor signaling effect by following certain rules.

 

(Full Post: http://cdixon.org/2010/03/11/the-importance-of-investor-signaling-in-venture-pricing/


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Chris Dixon

Chris Dixon is an investor at Andreessen Horowitz. He was previously the Co-Founder/CEO of Hunch, Co-Founder of Founder Collective, and Co-Founder/CEO of SiteAdvisor.

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Filed Under:
Collection: Funding
Category: Choosing Investors