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Until this year, valuation multiples for venture-capital funded startups rose dramatically…again. These high-priced investments had to garner correspondingly high exit prices to generate adequate returns. This was yet another financial bubble, like the dotcom boom, the housing boom and others before that. As we know, bubbles inevitably pop.
One of the boom’s causes was low interest rates coupled with high stock market prices. This caused investors – primarily pension and endowment funds – to seek higher returns, with venture capital as the major beneficiary.
I am not as concerned about this bubble popping as I was about its predecessors, because venture capital represents a relatively small proportion of total invested capital. Losses will be confined to venture funds, shareholders, and lenders. The venture firms can afford it – it is not their money at risk. Most venture investors are wealthy enough to absorb losses.
I do worry about founders and employees who, hoping for big payoffs, accepted low salaries in exchange for equity and stock options. They will be the losers. There have already been some media reports of this. If they are young, they have plenty of time to recover. Older employees, with less time, will be hurt the most. My advice to them is to accept lower equity (option) stakes and negotiate higher current compensation packages. That may be very hard to do, but it is prudent!
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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations. For more information, visit www.wesresvaluation.com or call (614) 448-3700.
Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.