1/ Increasingly hearing about double-digit million "Series A" rounds on companies with low single-digit ARRs.
2/ Revenue multiples on these things are in the 20-30x range sometimes, which is pushing post-money valuations towards the $100M mark and beyond.
3/ For a truly unique tech and a truly stellar team, this is not necessarily irrational - not in a world where a lot of markets can sustain more than one player with $100M+ revenue levels.
4/ But a lot of these rounds are happening in companies that are (by definition?) quite average in terms of team strength and operating in markets that probably can't sustain that revenue level and almost certainly won't sustain exit valuations in the $1B+ range.
5/ What this means, in practical terms, is that VCs doing rounds at these price levels are assuming an irrationally high level of operational excellence in order to hit their performance targets - which is just not going to happen.
6/ If you are doing a $100M round and believe you have a 1/20 chance of a $5-10B outcome, (you are an optimist) but you are not irrational. That's an expected value of 5% x $7.5B or $375M - roughly a 3.75x return which is (barely) acceptable by VC standards.
7/ But, in reality, exit outcomes are capped at ~$1B for a lot of these companies in a lot of these categories. So what you are REALLY doing, is saying that you need a (37.5%) chance of getting to a $1B exit to hit the same expected return.
8/ And what THAT really means in practice is that you are saying there is a nearly 4/10 chance that the team can take revenues from low single-digit millions to $100M within a VC time-scale of 5 years.
9/ The odds of that happening (30-50x revenue growth in 5 years) is not 40%, even for the best teams in the best markets.
10/ Which returns us to VC 101 which is that if you are not swinging for the fences (and with a good sense for how far the fences are and how balls & bats work) it's unlikely to end well.
