The speaker notes that he is willing to overpay for a startup he really believes in, but will sit out from investing in startups with high valuations that he can't get his head around. He believes that high valuations in public markets will trickle down to venture capitalists.
Early stage venture investing has low average returns with a high risk of negative returns, but the key to success is in the individual companies within a portfolio rather than the industry as a whole. Despite the risk, venture investing remains a popular asset allocation strategy for many investors.
The speaker cautions against investing based on short time horizons and focusing on the company's popularity instead of its potential for long-term growth and profitability.
The speaker believes that companies need to think about the real dilution of capital and treat it as a precious resource. Burning through a large portion of company value quickly can lead to potential crisis in the future.
A macro view of the venture industry shows that top quartile data from Cambridge Associates reveals that the valuation of an average company, if one were able to get out, would be around three to four billion dollars.
The venture market is a power law market where good companies attract more competition from VCs, leading to higher percentage ownership for founders and lower returns for those who missed out on the best deals. This is likely to continue in a cycle of capital investment and withdrawal over several decades.