Returns

1. Investment returns can be thought of through entry and exit points: What valuation do we enter at, and what valuation do we exit at?
2. In early stage investing as a venture fund, we need our winners to be really big (100x multiple or even more). This is because there are a lot of losses at the early stage, and even companies that end up doing well may not provide you with liquidity.
3. (Approximate) Target rate of return at each investment stage:
   • Pre-Seed, Seed, and Series A: 100x
   • Series B: 10x
   • Growth: 3x

What factors affect valuations?

1. HF has invested a first check into startups that were valued at less than $1M, all the way to above $30M (post-money). A startup’s valuation can be boiled down to 2 factors: Supply / Demand and Geography.
2. Supply / Demand:
   • Supply — How much capital is the founder raising? If a founder is only providing a small allocation to investors, and if this is a “hot” deal, this can drive the valuation up.
   • Demand — If a high volume of investors want in on the deal, the valuation will go up as founders can be selective with which valuation they’ll accept.
3. Geography: The concentration of investors can also affect valuations. In areas like Silicon Valley (that have lots of investors) founders can drive up the valuation. Conversely, in areas with only a few investors, investors have the leverage.

Evaluating Valuations

1. Valuations will depend on the current market and stage. The figures we covered in this video are at the Pre-Seed stage (i.e. there’s a product, but no or little revenue - maybe $5-10K in revenue).
2. General range of (post-money) Pre-Seed valuations based on geography:
   • San Francisco / Silicon Valley: $4M - $30M
   • Rest of the US and Canada: $2M - $6M
   • Emerging Markets: $250k - $6M (are there acquirers? is the market capped?)
3. The most important consideration when evaluating a valuation (at Pre-Seed) is: Do I believe I can get a 100x return on this investment if things go well? If the idea isn’t big enough, ****then ****getting in at a low valuation may not translate to hitting your target return.

For seed - usually will see $8M post money valuation

For series A - Usually $20M pre-money, $25-30M post money, but starting to see even $30M min to $100M pre money. This reflects a shift in stock market investing because later stage investors will use small checks in Series A as options. Later in the growth stage they will put in $50M and make their money.