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VC views on opportunity sizing

November 8th, 2008

I’ve met with and discussed business opportunities with a wide variety of Venture Capitalists here in the silicon valley.  I always ask VCs how they valuate opportunities and what criteria they use to determine whether an opportunity is big enough to invest in and pursue.  Beyond their usual pithy statements around “I invest in good teams not necessarily the strength of a single idea”, a few of them have given me insight into their investing patterns.  I’ve been challenging myself to write up more of what I learn but haven’t found as many hours in the day as I’d like (yes, we all have this problem and I’m waiting to invest in whoever can solve either by a) adding hours to the day or b) cloning).

My problem was solved recently when one of the VCs I know started writing an informative blog about their viewpoints and positions.  I’ve found the blog to be fairly fascinating written by RRE Ventures and I wanted to share two recent posts.

The first post I wanted to highlight was around how VCs come up with valuations.  RRE gives their thesis that everything is rooted in the public markets, that they have to use the most liquid market they can find to make valuation estimates on individual startups.  I like the point that RRE makes around using whatever tools are available no matter how “chunky” in nature:

http://fiveyearstoolate.wordpress.com/2008/10/24/flat-is-the-new-40-markup/

The second post that was interesting to me revolves around making future projections on your revenue stream.  The RRE poster all but admits that if you can’t reasonably project $50M in revenue over the first 4-7 years they most likely won’t invest in you.  I highlight this post because I know this is the struggle that many of us are dealing with:  how do we find ideas that are big enough? 

http://fiveyearstoolate.wordpress.com/2008/11/04/the-truth-or-what-we-want-to-hear/

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