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February 8, 2011

I think there are three fundamental truths regarding the valuation of early stage businesses by potential investors:

  1. The first is that a pre-money valuation is ultimately an outcome of negotiation, rather than a mathematical calculation of discounted cash flow or any other metric of potential company performance.

  2. The second is that, despite the typical non-reliance on formal calculation, investors’ views on valuation are in some way based on a perception of risks and potential return of the investment—or, put another way, of the interaction of fear and greed.  

  3. The third is that pre-money valuation is just one of many funding terms and conditions important to investors and companies, and not necessarily the most important...

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