Three years ago, when I told people that I was doing venture capital in Brazil, they would usually ask “Why?”
Two years ago, when I said the same thing, they would say, “Interesting.”
Now, they say, “I am too."
The influx of venture capital to Brazil, while great for entrepreneurs and our venture ecosystem, seems to have brought with it inflated valuations.
Last week I had a call with an entrepreneur that said he wanted a R$30 million pre-money (pre-investment) valuation for his company. His 2010 revenue? R$1MM. That represents a 30X multiple on revenue – not EBITDA, not net income – revenue.
Very high, I thought, but maybe the growth was so extraordinary that the valuation was justified. I asked, and was told that revenue would be $R20MM. Oh good, “In 2012?," I asked. “2016”, was the answer.
Wow. To understand how ridiculous that is, consider that Google is currently valued at less than 19X trailing income.
It was a friendly call and I never get indignant about business but, in retrospect, that’s not cool. It’s not healthy to expect that valuation and it’s not smart to ask for it (the investor will think that you think they are a fool).
We want to work with driven entrepreneurs building world-changing companies. We will work hard to make those companies hugely successful and drive extraordinary financial returns for our entrepreneurs.
But remember that venture investors like Arpex are also running a business, a business that will fail if we invest at unreasonable valuations.
After the call, I sent an email to my partner saying, “Good company, crazy valuation.” And he shot back, “Too bad — the market is being destroyed before it exists.”
Let’s remember that investment transactions do not need to be zero-sum games, in which one side wins and one side loses. At its best, venture capital is the ultimate win-win proposition for investor and entrepreneur — that can only happen at reasonable valuations.