Monday, November 07, 2005
Inflation, Risk, and 2.0
One of the sure signs of bubblism is inflation in ventureland; that is, a growing pool of money chasing a shrinking pool of great ideas; this can lead to riskier deal terms, inflated valuations, or both.
Yelp just snagged a $3m A round from BVP. Now, the interesting bit is that Yelp only has 100k users.
This time last year, or even 6-8 months ago, the bar was much (much) higher - at least 500k, if not more, users.
Now, this is not inflation in valuation terms. Yelp's value/user is still pretty close to the average for all 2.0 plays.
But is inflation in terms of risk. I've heard rumblings lately that many of the risk-minimizing criteria folks were holding on to until very recently were about to go down the tubes, as they essentially become more risk-seeking, and look more aggressively for Next Big Things.
I think this a nice example that the (now) old criterion of 750k-1m users just got vaporized, and it's a nice datapoint to keep in mind.
I think you're missing an important dimension in your post: company valuation. There are plenty of companies being funded with zero users. The question should be: what percentage of the company did the $3mm buy? 10%? 50%? With out an understanding of the valuation, it is impossible to determine if this is lowering the bar or not. Now, if this were an acquisition, it would make complete sense to talk about $/user.
You're right about the post-money (I'm just assuming 30-50% equity, didn't want to do all the math in the post), but that's kind of separate from my bigger point.
The point I'm making is about the bar on traction itself. ie, less traction is required to attract capital, regardless of value. This implies a greater appetite for risk.
That said, I don't know of many companies getting a rounds from guys like BVP at zero users, that's for sure...but I would *definitely* be interested to hear examples.