Ben Brostoff

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10 Feb 2021
Shots on Goal Means Higher Value

How many business stories are variations of “We tried X and it didn’t work, but a small part of X was promising, so we pivoted to Y, and then…”?

Another common one - “We approached someLargeNumber of investors and were rejected by every single one until someUniqueInvestorWithContrarianViewpoint took a chance on us.”

Anecdotally, both of these I think are common. I think the reason why is that more shots on goal mean higher probability of finding a price (value) where buyer and seller can transact.

In the product case, the seller offers different products / services and observes what the buyer is willing to pay for. The product offering and refinement process continues until the seller feels confident they can provide products / services at sustainable margins where a reliable pool of buyers exist.

In the investing case, the seller communicates with different buyers until someone is willing to transact. Henry Ward of CartaX had a great blog (in my opinion) on this concept. The idea in this post is that if prices can adjust flexibly as the number of buyers increase, prices will be significantly higher than if constrained:

That is why tender offers are good for investors and bad for employees. In most markets more investor demand means higher prices. But in private markets, investors fix a price and buy as much stock as they can at the same price. That’s why venture capitalists fight to “get into a round.” No matter how much demand exists, once the price is set by the lead, the price doesn’t change… If we had done an employee tender alongside our Series F, employees would have sold at half of what they were able to sell on CartaX. But because we did proper price discovery after our primary financing, employees were able to sell secondary shares at a 2.5x premium. Maybe we can call that the CartaX Lift.

2.5x. That is a wild premium. My hurdle rate is 10%, so this is close to 20+ years of returns for me. Said another way, letting prices float with the size of the market made a 20+ year difference to the seller.

Showing things to more people and building more things makes a multi-decade difference.


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