[as27]

Inflating a valuation by 50% to 100% over "fair market value" means that the company will have to grow by 50% to 100% to grow into it's own shoes/expectations.

Holding all else equal, if future investors value the company at fair market value A16Z will have over-paid to get into the round.

If this is true then what is A16Z's angle? Do they believe that overpaying is a cost they are willing to incur to get the best deals and concentrate talent in their portfolio? Does this concentration of talent make up for a company's overvaluation? Ie: does a 100% overvaluation with A16Z lead to a greater than 100% company growth compared with other investors?

[nedwin]

Overvaluation is fine if they have put in place protections for their capital, like liquidation preferences and anti-dilution clauses for down rounds.

In that case by pumping up a companies valuation in a financing event they're able to win the deal and put a stake in the ground for any acquisition offers.

If the company is acquired for less than the last valuation they still get all their capital returned to them under the liquidation preference as well as a percentage of the proceeds.

[as27]

What about up rounds?

[nedwin]

Well in an up round they would probably participate and the value of their stock goes up either way so they're winning.

[ForHackernews]

Doesn't overpaying help pump up the company and solidify the idea that it's "worth" whatever that inflated valuation is? In other words, it's a signaling game as much as an honest appraisal?

[as27]

Yes its a signaling game in the short run. But is there a point when people realize the company has been overvalued?

[ForHackernews]

Maybe the VCs hope they will have already cashed out by then?