I believe investing in Startup Founders is an exercise in calculating the intrinsic value of the founder. One has to look at this rationally with no subjective bias. For a better primer or intrinsic value read my previous post on Berkshire Hathaway – Owner’s Manual, here is a excerpt:
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
From a venture investors standpoint calculating the intrinsic value of a startup is really difficult as there is no cash flow or even a business model yet. In addition to that one has to understand how Conditional Probability works to see various relevant conditions that need to have happened to see if your calculation of intrinsic value which in itself an estimate is within an acceptable ballpark. This is one of the reasons why many people don’t play in this space and consider this risky. I don’t consider this risky because I play a different role, similar to many of the successful Venture Capitalists and Companies have done. You basically ignore the odds, commit to work with the founder and move from one milestone to another in building a great business. If you build a great business then the cash flow part becomes easy to calculate and then even the intrinsic value calculation becomes easy, but as Warren Buffett says it is different for everyone because it is an estimate, the deviation is much higher in startups because most people who invest in startups do not take the time to calculate the intrinsic value of the founders.
