Very True by Verissimo

Speaker 1 (00:01.038)
So there's a big question and it goes back to a joke in the TV show Silicon Valley is like, you don't want to have revenue because then you get valued on revenue. You just want the story and it will be worth more if you don't have any customers or any revenue. And this is a question that a lot of founders come up with when they're really early stage. Should I just go out and hustle and get some revenue and get some money in the door or do I just keep kind of like building up all this potential inside the story so that it starts to fit together better?

And my view and the way I became an early stage investor is that they're one in the same. And it actually goes back to something that we did at Morgan Stanley, which I think probably we invented, which was called the discounted equity valuation. And when you understand what a discounted equity valuation is mechanically, you understand that that is actually what every venture capitalist, angel investor, whatever is trying to do when they look at a startup, when they value it.

Because basically what you're doing is you're not saying, I don't care what it's worth now. I care what it's worth in five years. I, because valuing it on nothing now doesn't make a difference. So if you basically say, all right, we can have a EBITDA multiple five years from now, let's just say. So let's look at the comps of, okay, here's a company that we think we're going to look like in five years that's at scale to actually be valued properly by the market. Here's how we think it's going to be valued. Here's how long we think it's going to take us to get there.

and then we apply a discount rate every year. So they're being valued on 2026 numbers. We're being valued on 2031 numbers, right? And so we need to discount it back five years at some discount rate. And so it all goes back to my idea too of just like, it's all about the DCF. Basically what this allows you to do is really kind of just focus on that terminal value term, which when you're looking at non-casual positive startups is,

sometimes more often more than 100 % of the value of the company is the terminal value. And usually you figure out the terminal value either with some growth rate or with some PE or even DAW multiple. let's bring it back. Basically the idea is that you need to decrease your discount rate to whatever extent possible. So now if we go back to how I became an early stage investor, it goes back to my good friend, Michael Stoplman.

Speaker 1 (02:23.17)
became a full-time angel investor who was doing a bunch of seed deals. And he said, now some of these companies, they're doing well, they're starting to get traction. They need to go raise series A's. He's like, well, you were at NEA for three years. Like you did a bunch of series A's, right? I was like, yeah, I think I did like, I think 12 of the 20 deals I did were series A's. And then I sat through, you know, 250 investment decisions, which was just like, you know, it's very humbling when you realize that your greatest experience in life was just being a fly on the wall. But I was like, yeah, I think I know. And my specialty is obviously,

numbers, finance, business models. And so what you really have to do is say, okay, there are five things that matter about how we look at the value of a company. There's the team, the market, the product and the technology, the business model and the traction. And all five of those form the story and the narrative of that company. There's the team, the market, the product and technology, the business model and the traction. And they're all independent.

this one more time.

Speaker 1 (03:21.294)
Truthfully, I came up with this on the fly. I was interviewing someone, meaning I was already at NEA. I was interviewing a banking first year. And he asked me, otherwise he was just interviewing a private equity, how do you guys value businesses? And I literally came up with this on the spot in 2014. And I hold by it stronger now than I do then. And the art of venture is obviously knowing which of these five matters when. And then how do you ask the right question and look for the right information to suss out each of those things once you figure out they matter?

That's really the art. The science is just, here's the five things. And then you could build a spider chart of what matters at what stage and what sector and whatever. So going back to the point is like, do you want to have revenue or do you not want to have revenue? Any venture capitalist who's valuing you on, you have 500K of revenue. And so maybe that's a 12X. So you're worth $6 million. that's not your investor, right? Now, when you start getting into sell side conversations and you're dealing with Corp Dev, they still very much live in that world because

Oftentimes they're publicly traded and that's how they're being valued and they need to benchmark it to that. There's like this kind of revenue based accretion dilution math, which, you know, when I was in banking, was, you know, earnings based accretion dilution math, but it's very much one in the same. And so this is all to say that when Stauffman was like, Hey, you know what these companies need to raise series A. what I always say is, you know, I'm, we're not talking about deep tech here, right? We're talking about, you know, kind of

What now, Andreessen Horowitz calls their apps business, right? Like the breadth of that is what we're discussing right now. Those types of companies, which is a decently wide range, but what we're trying to do is validate the narrative. Now,

early on, it's all just the team and the market. Then it becomes, because now you've got some product. OK, but what's the best way to evaluate a product? Or to validate a product, it's to show you have customers and customers that want to pay you. So everything points towards validating each aspect of the business. And I always talk about we don't in venture, there's really no such thing as downside protection. What we care about is upside protection. And so what we want is

Speaker 1 (05:35.128)
We've got this image for five years from now that we've painted on the wall, that we're projecting onto the wall five years from now. And we need to increase the fidelity and the resolution of that image. And that the action of doing that is basically trying to decrease the discount rate. So anything you can do, whether it's who you add to your team, what products you do, like what your customers are saying about you, how many customers do you have? Like this all matters as long as it's

part of that same narrative that points toward that five years from now, maybe even 10 years from now projection that's up on the wall. And what that does is either A, it brings it in because we don't really know if it's five years or four years or seven years or two years, right? Things go faster and slower almost always. So we want to validate that the discount rate, instead of it being 25%, it's 15%. That massively increases the value of your business. And then the numbers weaving that into the story really

As you get from like a super early stage company to what prototypically was a series A, I've written about this extensively. Like what's, what do you need to de-risk and validate and illustrate the upside of at each stage of a business, you know, and at series A that point, which again, people call it C, what I don't know what it is anymore, is how do the numbers then validate what you've been talking about from a team and market perspective. And then you've got some product that works. And again, the only way we know the product works is if people are paying for it and using it at.

Use the word to decrease your discovery right to you. think you understand what it means for making. Are you saying decrease discovery that means decreasing risk. Okay, so okay.

Yes. Yeah, yeah, sorry. So the discount rate, the R in the DCF equation is how you discount your future earnings. So it's just this fundamental idea of the net present value. And if we say, we think a dollar tomorrow is worth 1 % less than a dollar today, okay, so you can extrapolate that out, it may be. typically for a venture company, you're saying that it's 20, 25%. I think that's kind of...

Speaker 1 (07:42.732)
reasonable for a discount rate due to liquidity, funding issues, the fact that you're not profitable and you don't control your own destiny, right? Like potential, anytime an organization is changing quickly, right? always, by the way, just while we're on the subject, from series A to series B or into series C, what you're typically then de-risking is less that the revenue engine works and more that the organizational expansion works that's gonna be able to take you not from being a five to $10 million a year company, but to...

What's, is this gonna be able to, is this team and this setup and the way you're organized and where your offices are and all that stuff in your management layers gonna be able to take you to a hundred million plus. That's the questions that you're answering at that stage. But at the earlier stage, you know, it's all towards validating that. And so what I often bump into is founders who will, they'll hit on like three of those five things, but you don't really know what an investor cares about more.

Unless they tell you and it again it varies situation to situation, but it might be that other thing and so I always say the only way to make sure you look good just to actually be good and so You gotta you know when it comes down to it Having revenue is better than not having revenue as long as the revenue points towards Having a lot more revenue down the road if you're like, we went and did some consulting stuff on the side and like no No, because that you're selling a product the other example I give is the similar

to when you're pitching yourself in an interview for a job, right? Someone's sitting there looking at your resume and they go, walk me through your resume. That's the same thing as walk me through your pitch. And how young you are as a company or as a professional mandates how far back you have to start. Like when I was five years old, right? Like that's a little far back often to start as a entrepreneur, but as a 21 year old interviewing for the first job out of college, like that's not that crazy probably, right? You say,

If you start last year, I did this in your interview job. Now again, that's all subjective and who likes what and what investors and founders feel comfortable with. And there's a huge ray of opinions and they can all be correct. But the whole point is that when you go through that, walk me through your resume exercise, what you're doing is saying like, when I was 16, I did this summer program because I wanted to learn about this so I could do that. So then I would be perfect for this job right now. Right. When I took this class that this second semester,

Speaker 2 (10:00.526)
Okay.

Speaker 1 (10:05.07)
junior year of high school, right? Or when I studied abroad in this place, I wanted to do that so I could better understand this aspect of this culture, which would point me to this, which would help me understand that, which would bring me back to being perfect for this job that I'm sitting with right now. And so the story is actually simpler as a startup. You say, I want to get to a hundred million dollars of revenue, right? Like that's the number on the wall. Fine. Maybe it's bigger, maybe it's smaller, but that's a safe number. No one's going to criticize you for that. And if they are good for them.

But basically, yeah, you've got to figure out how everything points to that. the fewer steps and hoops that you have to jump through to make that seem realistic, again, the fidelity of that image, the clearer it is for people, the easier it is for them to jump on. And that's why, again, people focus big time on founders, because when you look at really successful companies, you often see the founders, especially the ones that make the most noise, have a certain type of personality. So people tend to overindex on that, I think.

It's not the only way to you know skin the cat as they say but it is common and so people send it be like well This person is an amazing leader and they're so charismatic and they can sell and they have this great pedigree and whatever So they'll figure everything out and like maybe they will maybe they won't but like there's a view that like if that's the case then it's more likely than not so let's just start with that as table stakes and then we'll figure out the rest of the stuff from there, so that's all to say that the main takeaways are like

Everything is about that hundred million dollar picture, whether that's three years from now or seven years from now or 10 years from now. How do you increase the fidelity of that image? And you have these five dimensions through which you need to look at your own business and other people will look at your business to evaluate that.