I can't understand a single word in this whole convo
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Replying to @SundayTedium
That’s fairly normal when one listens to a specialist talking to other specialists. In this case, it’s a narrow segment of industrial finance which for structural reasons is extremely important in the tech industry. The quick version, or Google “pre post money valuation”:
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Replying to @patio11 @SundayTedium
Suppose an investor wants to invest in a company, giving them money now in exchange for earning hopefully more money later contingent on them growing successfully. They and the company have to agree on a) how much money and b) how much of the company they are buying.
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Replying to @patio11 @SundayTedium
(There are a lot of other factors, but for comprehensibility the best investors and the best companies converge on an equilibrium where many of those factors are much less salient.)
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Replying to @patio11 @SundayTedium
Round numbers to make things easy: suppose an investor offers to pay $1 million for 10% of the company. If you notionally extended this to them buying 100%, which is not on the table, that would cost $10 million. That is the “valuation” of the company.
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Replying to @patio11 @SundayTedium
Venture capital (VC, this segment of finance) describes valuations in one of two ways, historically because there are some people you want to describe valuations as low to (people giving you money) and some you want to describe them as high to (people you give money to).
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Replying to @patio11 @SundayTedium
If you end up owning 10% of a company for $1M, that is the “post-money (or post) valuation. Since the company is worth $10M *with your money in it*, the “pre-money” valuation is notionally $9M. If you and a friend are in the know, you can say “I got in $1M at $9M pre.”
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Replying to @patio11 @SundayTedium
Back to the gamesmanship aspect, of an entrepreneur says “I think my company is worth $15M” and a VC says “We agree, we would happily invest $3M at a $15M post-money valuation”, the entrepreneur may think they just got what they wanted but probably didn’t. This happened a lot.
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Replying to @patio11 @SundayTedium
The other jargon words are for stages of fundraising a company goes through and the slightly different constellation of investors who invest at those stages. Broadly they start “Small investors putting small money into very risky companies with few proof points.”
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Replying to @patio11 @SundayTedium
And then gradually you are instead dealing with a few very large investors who put very large amounts of money into very large companies which, while risky, have generated large amounts of signal on whether the companies will be “ultimately” successful in their aims.
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“Ultimately” in scare quotes because companies in principle can last for extremely long timescales over which they’ll sometimes be very successful and sometimes not, not necessarily including going away.
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