Yesterday was an excellent day for reading.
First, Hunter Walk wrote a post on not worrying about market size when considering Seed Stage Investments. You should read that.
Then, you should read Aswath Damodaran burn down the house with his post on valuing young, growing companies.
I read both of these and was struck with something a mentor told me awhile ago: venture investing and equity investing are pretty much on opposite sides of the financing spectrum.
Did you know that most venture investors are admittedly bad public equity investors? It makes sense: the skills you need to be a great early stage investor have almost nothing to do with the skills you need to analyze a publicly traded stock.
At the early stage, you’re mostly interested in the team trying to solve a problem, and the problem they’re trying to solve.While that relates to a market and there are macro factors to consider, the bigger pieces are harder to incorporate into a framework for deciding if a Seed Stage investment is a good idea, mostly because there’s so much uncertainty around it — a market can completely shift between the time you make an investment and the time in which the broader dynamics of the market really matter.
Investing in equities, on the other hand, should be a disciplined practice of analyzing the present value of the discounted future cash flows of a business. There’s a lot more data to work with at the public equities (and probably a lot more noise), but the current market dynamics matter a ton. This is further compounded by the fact that companies are hitting the public market far later in their life cycles than they used to.
A lot of investors try to think about Seed Stage investing using the framework they learned as equity analysts. While that may work sometimes, those investors are likely to miss a bunch of opportunities by overlooking great teams building great products.
** This was originally published on medium.com