Do Startup Valuations Matter for Investment Returns?
The argument that prices should matter for returns is simple: if a seed round is more expensive, then that…
Savannah Nguyen•Oct 24, 2023We walk through dispersion, power laws, and why entry price still matters in a world of outliers.
The Myth: “Valuation Doesn’t Matter”
You often hear VCs say, “We’re price insensitive.” In a power-law world, one winner can return the entire fund. But that logic ignores the math behind outcomes.
Entry price defines ownership, and ownership defines exposure.
Understanding Dispersion
Returns in venture capital follow extreme distributions. The top 10% of deals generate nearly all returns. However, if you systematically overpay, your multiple compresses—even if you pick a winner.
An investor who buys 5% of a company at $20M pre-money versus 10% at $10M pre-money ends up with half the return for the same exit.
The Power Law Meets Math
Power laws are unforgiving but predictable. Lower entry prices compound returns faster. Price matters less if you have perfect foresight—but no one does.
Practical Takeaway
Valuations reflect narratives, but narratives change. Discipline in entry price isn’t cynicism—it’s survival.
Early-stage investing is still about conviction, but it works best when conviction meets math.