At the formation and seed stages of a startup’s lifecycle there is very little information available.
It is impossible for an investor to use traditional financial modelling to value the venture.
Qualitative data, competition and relative value analysis are more useful for investors during this stage of the startup’s lifecycle
Investors are effectively valuing the option value of their pro rata right to follow on in future funding rounds.
Due to the nature of the asymmetrical nature of startup risk, it is crucial that investors invest in a highly diversified portfolio of ventures – a beta approach.
It is now possible for some investors to add alpha, to ‘pick winners’ and outperform a diversified portfolio or index.