Shahin Farshchi explains that late-stage startup valuations can be misleading because the headline number often omits deal terms (the speaker likens valuations to "complex numbers" with visible "real" parts and hidden "imaginary" parts). He highlights liquidation preferences as a key term that determines who actually gets paid (giving a hypothetical example where an investor with a 5x preference takes most proceeds). He stresses checking alignment among founders, investors, and employees. In a following Q&A he outlines what it takes to start a VC firm: long patience, persistence, a clear differentiated thesis or exclusive founder access, and a track record (he notes Lux's founders spent seven years building the firm before he joined).
Questions this video answers
Seven years.
Five times (5x).
Chapters
The lesson from WeWork should be that when somebody presents you with a evaluation and they give you an answer, which is a number, that is not a complete answer. What are the terms that are attached to this number? And then you have to ask yourself whether you're a founder or you're an employee or an investor looking to invest later as what the implications of those terms are for you. What are your thoughts about what's happening with WeWorks right now? What's happening with WeWork? So I am not close to the company, so it's very difficult for me to comment on the behaviors of the investors or the behaviors of the founder or the CEO. What that does bring to light, what everyone should walk away with, is that valuations are, especially in those later stages of the company, later stages of the company start to become complex. It is a complex number. How many of you guys know about the issue? I mean, how many guys are engineers? You guys have complex numbers. You have a real part and an imaginary part. So the real part can be expressed as a real number and an imaginary part as a whatever. It's denoted by I, which is the square root of negative 2. So anyway, the point is that when you see the valuation of a late stage company that's backed by the likes of SoftBank and these later stage focused firms, the valuation is actually a complex number. And the number that you see is only the real part is only the part that you can see. And there is this whole imaginary part that's not apparent to the broader world that has a huge impact. So there's a concept called preferences. How many of you guys are aware of preferences? Some of you are nodding your heads. So preferences basically means or imply who gets their money back. So I can, for example, set a one billion dollar valuation on your company from my $10 million investments, but I can set a preference in there where I get five times my money back first before any other investor or any other common shareholder gets a dime. So I can walk away. So if you get acquired for $60 million, then I get $50 million and $10 million gets distributed amongst the remaining shareholders. So somebody before me invested at a $50 million valuation. They're going to be underwater. And the leadership and the employees may not get much and their options are going to be underwater. So the lesson from WeWork should be that when somebody presents you with a valuation and they give you an answer which is a number, that is not a complete answer. The answer is what are the terms that are attached to, to this number? And then you have to ask yourself whether you're a founder or you're an employee or an investor looking to invest later as what the implications of those terms are for you. And as an investor or as an employee, you should also ask yourself not only what are the implications, but am I aligned? The question that comes up with Adam and Newman and SoftBank and the employees is, were all these entities aligned with one another? Does Adam, who walks away with a payday versus employees whose options are now underwater? Were there incentives or are they aligned together with the goal of building a great company? And I'm not going to comment on that because I'm not close to it. But again, the moral of the story, the takeaways, understand what those terms are, what those details are, how it impacts you, and whether or not you are aligned with the people that you think you are aligned with, which is your CEO, your management team, and your investors. Does that answer your question? Okay, there were other questions in the back. Go ahead, straight ahead. What does it take to start. Start a VC business? What does it take to start. It takes a lot of grit to start a VC business. So I've, I joined Lux in our early days and so we were building our firm at the time. I can tell you that it takes a ton of patience, it takes a ton of persistence. A lot of credit to my partners, Peter and Josh, who are the founders of the firm. They were. They spent seven years building, building the firm before I showed up. And at that time, a lot of entrepreneurs and investors, especially here in California, didn't know who we were. And we had to prove ourselves. And although we still have to prove ourselves to this day, but we had to introduce ourselves and tell people about what we'd done before and what we focus on and what our values are. And it was a lot of effort, but ultimately that effort paid off. And so the question you should ask yourself if you're looking to start a venture capital firm to the comments that I was making earlier about the abundance of capital in the system is why does the world need yet another venture capital firm? And the answer to that question should be either, hey, here is a set of founding teams or community of founders that I have access to that other investors do not have access to. There is a pocket of great founders in this geography or in this discipline or in this demographic, or there is this nascent market that no founders or entrepreneurs are going after. And I have access to that community of those founders that are going after this. And here's why this is interesting. And you should put money behind me. And this is what you would sell to a limited partner who would be putting up money for the fund for you to go after that area that other venture capitalists that they're also invested in do not have access to. It's either that or it's a unique point of view. And that is similar to our story, which is that we had a point of view at a time when a lot of folks are going after Internet companies and e commerce companies and clean tech companies, that we are going after areas that other venture capitalists don't pay a lot of attention to or kind of put in their other categories. But that is our specialty. So we believe before others understand. We believe before others really pay attention. If a founder goes to a name brand VC firm, that name brand VC firm may not open the door. But that's an area that I appreciate and understand and want to pursue and invest in. And you may be able to sell them on that. So access to a community and a unique perspective and seeing value where others don't. If you can make those cases, then you can potentially access capital and access people to work with you to then go after those opportunities. Sam.
