I’m currently reading the “Facebook effect” by David Kirkpatrick. In it, it’s discussed how Peter Thiel made the first angel investment for Facebook. It was a $500k investment for a 10.2% stake. Some say that actually might be the best investment in history, because it’s now reportedly worth between $3-4 billion with Facebook’s estimated value topping $50 billion. That’s over a 6,000x return on his capital in 5 years!
It’s interesting because Peter Thiel made the investment (bet) without Facebook really having much revenue. In my experience, the investors, especially those that have not invested in the same industry before, always like to use past revenue as a negotiating
point…”How do you say you’re valued for that much, when you only made this much last year?” I point out that Internet startups, eg Twitter and Facebook, would never have been able to raise any money based on multi-million $ valuations with that reasoning. There’s a lot more to counter that question with but I’ll save that for another time
It’s kind of like how employers like to use past salary to determine how much to pay a candidate. I say you should pay what the market value for the candidate’s role will be, not how much he made in the last job. I’d be interested in hearing other people’s thoughts on how they would reply to investors with similar questions.