• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

Warning: Unrealistic Valuations in the Bitcoin and Blockchain Space

warning-imageTwo patterns I’m seeing both pointing to some unrealistic expectations in startup valuations in the Bitcoin and Blockchain segments.

1/ High seed valuations, with incomplete teams and products, based on speculative future value

2/ Large Series A or B rounds that are swinging for the fences, without a strong foundation

This isn’t based on historical data, but it is based on what I’m seeing right now. The numbers will show this in a few months.

In real estate, there’s an accepted convention that your house is worth exactly what the buyer is willing to offer. In the venture capital space, some entrepreneurs are thinking the same way, i.e. as long as investors are willing to pay a price, then why not.

The difference is that a house is a physical piece of collateral, and that includes the land value that it sits on. But a startup’s valuation is based on some assumptions of growth that are either real or speculative. It’s OK if the startup gets valued a little ahead of its real market valuation, as long as its traction keeps moving in the right direction, and it will eventually justify that valuation and often exceed it in the next round. However, if the startup doesn’t move forward, down rounds, layoffs and other bad effects start to happen.

Some startups are raising more money because they see the train as passing once. I’ve even heard some raises shooting for a 4 year runway.

Out goes the orderly convention of raising for 12-18 months, showing results and progress, then raising more as needed. Non VCs (code named “Strategics”) are entering the game, and they have no track record in venture capital, nor understand investing in tech startups the way a VC does. So, they treat these investments as one shot deals, like a bet, and offer money and promises of partnerships or product usage, but no one knows if they will be there for future rounds.

A disciplined investor with a track record will not typically go into a deal that is not priced right. They will walk away and think there’s always another deal around the corner.

Higher Series A (and some B) are happening, because some investors are fearing they are missing out on blockchain investments. But the landscape is still forming, so it is very difficult to accurately spot the winning horses, because even the rules of the race are in flux. Raising a large Series A when there is not yet a clear path to traction, nor a well-defined product is risky, and you may be setting-up the startup for failure from greater heights.

What matters in pricing a seed round is your current position. It is your starting point. What have you done so far in order to justify the valuation being asked?

It’s better to ground yourself in today’s reality, and not in future euphoria.

I like to refer to this Valuation Data tool from AngelList that aggregates average valuations, and lets you filter the data by location, market and other parameters. It shows an average valuation of $4.1M for early deals.

Just because a space is hot (e.g. blockchain) doesn’t mean that your starting valuation should be higher, unless there are other valid reasons. If you haven’t built an MVP or team yet, your early risk is the same, whether the market is big, small, hot or not.

Yes, the blockchain is an amazing piece of technology that represents a unique and rare transformation opportunity, and the market is potentially huge, but it is not any different than the Internet’s advent in 1994. It needs to gradually grow and infiltrate the various nooks and crannies it can fill. Rushing its development will not necessarily rush its deployment.

I’ve already issued my first warning, six months ago in February 2015, The Bitcoin Startup Ecosystem is Frail: Beware of the Next Crash, and Fred Wilson added by reminding us that The Carlota Perez Framework might apply here, i.e. we will overshoot into the installation phase, before smooth sailing into a prosperous deployment phase.

Speed kills. Some entrepreneurs are getting greedy. Some investors are becoming fearful. Greed, fear and speed are not a good combination.

  • CrowdFunded

    This is why you issue a token. Ten million out the gate, no problem!

    • :) I hope you’re half-joking.
      Tokens are great if value follows, but a disaster if it doesn’t.

  • Hi William, interesting topic but hard to debate without specific cases. For example, round for 21 seemed very high, but for BitFurry – not so much.

    We specialize in the consumer remittances space, and there is definitely NO rich rounds there: better for B2B, B2C; for but for C2C a Bitcoin-based remittance startup is lucky to raise $100K+, even with live customers and functional product.

    You might be interested in our piece on Bitcoin for remittances: https://www.saveonsend.com/blog/bitcoin-money-transfer/

    • Thanks. I’m aware of your site and blog is superb.
      I can’t disclose the cases, but there has been a few. Hopefully some of them will be visible soon.

    • bruno cecchini

      Good post,

  • The influx of strategic investors into the Bitcoin/Blockchain space is particularly interesting. Off hand, I can’t think of any other verticals where corporate investors are getting involved so early on.

    • True. I’m not sure if it’s good or bad yet, honestly.
      I’m hedging on thinking they are better suited for later stages, and not seed/A rounds. They could offer help during the early stages of a startup in order to figure out if they are a good fit.

  • Having seed funded several of the foundation infrastructure plays in the space I have shifted my attention. The time for science projects is over and the time for cash accretion has arrived.

    • Hi Trace, and thanks for stopping by!
      Indeed, it is time that more traction delivers on some of this innovation.

      • I agree with your article. But at the same time I think it’s difficult for bitcoin startups to evaluate themselves because even bitcoin itself doesn’t know what it’s worth, that’s why it’s so volatile as it’s still in a price discovery phase. For Vaultoro.com to come to our evaluation of 2.8 mil we have taken our growth in bitcoin / gold trading volume with of 91% Av / month and user acquisition to 21% per month into account, plus we have a philosophy that at least a few core revenue streams should be in place from day one which is then makes a projection more quantifiable. On top of al this is work done, IP, initial angel round and a heap of other parameters. But yes I agree there are far to many cool ideas floating around with no revenue plan but a silly eval. “21 seams like the most extreme”

  • Karl Chappé

    “A disciplined investor with a track record will not typically go into a deal that is not priced right” the history proves you’re wrong, look at what was the valuation of some startups during the internet bubble

    • Well, it’s tough to generalize like that.
      The VCs that were there then are a lot wiser today.
      VCs on their own don’t create the bubble; other investors and greedy entrepreneurs contribute too.

      That’s why I’m issuing a warning.

  • bittag

    From a historical perspective, the urgency to invest early (at higher valuations) has some grounded credibility. Consider the (ever shortening) length of time it took Microsoft to establish a dominant market position, then Google, then Facebook. By standing on the shoulders of a scalable cloud, a mature app ecosystem, and a smartphone in every hand, the Bitcoin company that shoots through the financial canopy will likely do so at a rate unlike anything we’ve seen before. Many “anxious” Angels and VCs understand that an early Bitcoin winner may not leave many crumbs behind for their “disciplined” colleagues.

  • bruno cecchini

    Personally, VC landscape don’t impress me so far, they make me remember the pension fund manager mentality back in 2007. People look at them thinking they are more knowledgeable about their business, but is a fundamentalist fallacy, the 2008 financial crisis proof that point. As my own project (Distributed Collaborative System),DAOs + DACs=DCS *ABC conjecture*, for seed funding I only need $300k/y to setup a hacker house in Montreal. How I did come with $300k that seem unrealistic, for one year of operation!!!!! We invest in junior full stack engineer aged 17y-24y their cost to us 1/6 of a full stack engineer based in Silicon Valley with the same skill set.One
    more thing, I build the playbook aka “cryptoconomy framework” by
    staying in my basement cracking algorithm for the last 3 years, not by doing a
    road show doing extrapolation about blockchain capability, that would be the
    best way to waste my time. My financial background gives me an edge that for
    sure, but like Gordon Gekko say *is not about the money, is all about the game*.

    • bruno cecchini

      I would show you the number on Twitter

wp-w3tc