Shahin Farshchi of Lux Capital explains that company valuations are auctions won by investors offering the most perceived value, not fixed formulas. Lux targets 3–4× returns on a $500 M fund by backing ten companies that each generate $200 M in value, requiring 10–15% ownership in each. He works backwards from fund targets to set valuations, knowing roughly 30% of portfolio companies fail and only a minority reach multibillion-dollar outcomes.
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How do we value a company? So there is no— so there is no algorithm associated with valuing a company, and there is no rule. Typically, in this day and age, given that we are in an environment where there is more capital than there is investable opportunities, then it ultimately turns into an auction. So you all should think of yourself as a chamber, as like this room, and stuff to do, working out, doing charitable work, spending time with investors, listening to podcasts, reading books, as like a gas, and any gas will ultimately fill up a room. So you will find yourselves, even if you choose to allocate every single waking hour to doing something productive, You will quickly see that every single waking hour will be taken from you in doing things that on paper seem pretty productive. So, and that could be everything from reading and learning and meeting entrepreneurs and meeting investors and talking to customers and doing all those things. And I think it's important to set aside, to allocate some time to your health. It doesn't have to be— So I allocate I can't dedicate an hour and a half every morning to doing a run, resistance training, and swim every morning, but I can allocate— I can easily allocate 2 hours, 2 and a half hours, or half an hour, or 5 minutes. All of that can be allocated. All of those options are on the table, and you can achieve almost the same thing. So, my advice to you guys is to think about what you want to allocate your time to and be disciplined as to how much of your time you allocate to it, knowing that, again, your time can be easily filled up with these things, especially in this neighborhood with so many places to go and so many people to see and so many folks to watch talk about venture capital and startups. So be disciplined as to what you allocate your time to and Create rules for yourselves and constantly revisit those. The question that was asked earlier as to how you're reinventing yourself, constantly go back and ask yourself, why am I allocating time to this? Why am I listening to this podcast? Why am I reading this book? Keep on asking yourself as to why you're doing these things and keep the end goal in mind. And make sure you also keep time for yourselves. It's easy to spend all your time taking your kids around or spending time with your spouses and all that kind of stuff. But also make sure you keep time for yourselves so you can constantly revisit and readjust as needed. Does that answer your question? Question in the back. How do we make a determination on the valuation of a company? How do we value a company? So there is no algorithm associated with valuing a company, and there is no rule. Typically, in this day and age, given that we are in an environment where there is more capital than there is investable opportunities, then it ultimately turns into an auction situation where the firm that can bring the most value coupled to the right terms will win the deal. So it's not just economic, it's the firm that in the founder's view or in the founding team's view can bring the most value and terms that are acceptable, net are most attractive, win the deal. And the valuations that firms typically attribute or like to attribute are valuations that fit their model. So, the venture components of our fund is $500 million, and we are out looking to make a multiple of 3 to 4x that $500 million. So, we're looking to return $2 billion from that $500 million that we're investing. And so to do that, we need at least 10 companies that return $200 million, meaning that we have to at least own 10% of 10 companies which will return $200 million each. Right, to generate $2 billion of proceeds. And the only way to get there is, again, only to invest in companies that can generate that multibillion-dollar outcome and own enough of it when we initially invest so that after we get diluted over future rounds of financing, that we end up as something around 10, to 15%. So if we're investing at a $100 million valuation and we're investing, let's say, you know, $15 million in that round, then the expectation has to be that this company can generate at least, again, a $2-3 billion outcome within a reasonable timeframe. So the calculation is done backwards from where the expectations are to a valuation that'll get you there under the upside scenario, knowing that, you know, 3 out of 10 companies fail, another 3 or 4 companies maybe return a 1 to 2x, and then the remaining 3, so you have a sub-30% probability that you'll even hit that kind of magnitude outcome, if that makes sense. Thank you.
