Emotional impact on venture valuation

It’s a brief post before wrapping up this week. It’s a World Cup week. Ever since Korea co-hosted World Cup in 2002, soccer has become a sports that brings in national attention. Last night, I saw a huge crowd near the Seoul City Hall cheering up the Korean team playing against Argentina, a strong winning candidate. Korean team unfortunately lost. This morning, it was quite interesting to see that ad sponsors that leveraged the World Cup effect on their commercial campaign also lost. Their stock values went down quite a bit. It’s one of good examples of emotional impact. It could have not happened if Korea won last night.

Venture valuation often creates controversy. If products are much ahead of the market curve, it’s hard to find a right pricing point for the products. Financial modeling often contains too many ‘if’s’ and it does not give a bullet proof base for a newly-created startup company’s valuation. Technology itself won’t just simply justify venture’s roaring valuation until products or services become more visible. At any rate, early stage venture valuation is still widely driven by founding members’ entrepreneurial contribution, level of capital supply, and emotional expectation.

Entrepreneurial contribution is something you hardly capture as tangible asset base for a new venture. Though, experience, expertise, network, and intellectual properties that entrepreneurial management team brings in is something that venture capitalists always wrestle with to find a right middle point of their own and entrepreneurs’ contribution and risk-reward levels.

Availability of capital in the market often drives venture valuation, too. Supply and demand applies to almost every venture valuation these days when we try to find price equilibrium or capital injection point. No one wants to take a hassle buying at over-priced ticket value too early. Though, if there is competition from capital participants, valuation often surpasses everyone’s justification level. This rule works same if there are limited supplies of capital, but there are too many similar venture businesses. If there are too many to shop, then, price point significantly declines or sometime companies can’t raise sufficient level of funding to build a business. This supply and demand rules works all the way to the public market. Many times, venture backed IPO in Korea is not received too well. I suspect that is mainly because Korea has relatively smaller capital market but there is a quite number of companies seeking attention from investors.

Emotional impact is probably something we won’t or don’t want to agree. Though, blind expectation for a new technology XXX had a previous case that created over billion dollor expectation for a young startup company that only had 2-3 years of history. Early champion in the market can command rightful price point for its own product selling and also its corporate valuation can fly high as long as the company keeps its status as “one-and-only” in the market. However, when competition starts sizzling and lots of me-too businesses run into the market, its margin ratio won’t guarantee high level of profitability too long. As an example, if luxury fashion business can hold its original designer label goods from imitation market for a week, it can sustain and enjoy current level of glory. Otherwise, it will fail. Often times, those black market shops bring out new season’s line-up on their windows before original designer hits the door of its retails.

As a venture investor, it’s great to gain knowledge ‘how not to lose’ in emotional expectation when you invest and also ‘how to win’ this emotional play when you harvest. Ultimately, you want to invest and grow “one and only” business that will sustain its high level of glory for long-time. At the same time, you hope to avoid any sort of unnecessary competition (I.e. either investment-wise or business-wise) to stay sane when you chip in.

Anyhow, where can I find this highly profitable but widely untapped business opportunity?

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