For an AI startup, a high valuation is good news. Right?
Who doesn’t love a high valuation? For a flash of a moment, a startup that garners a sky-high valuation is on the top of the world, stable and ready to conquer.
In AI, we’re seeing some startups snag incredibly high valuations. It’s an obvious thing to say by now, but bears repeating as the examples keep piling up. Just two cases in point: Cognition is valued at $2 billion at six months old, while Lightspeed-backed Foundry last month came out of stealth with a $350 million valuation.
Valuation is interesting both for its imprecision, and its knock-on effects: A high valuation garners media attention, and it’s really something to live up to for a startup, especially one that’s young. Theoretically, a high valuation is also unequivocally good news when it comes to attracting talent.
Not so fast. My colleague Sharon Goldman and I published a story untangling an emerging phenomenon: that a high valuation can sometimes be a detriment, rather than an asset, when it comes to recruiting key AI talent. As Lightning AI CEO William Falcon said:
“I don’t want to be in a situation where it's hard to hire people,” he told Fortune, explaining that he wants to make sure the company’s revenue lines up with a potential valuation, thereby limiting the risk of an eventual “down round,” where employee equity shares could end up underwater. Today’s job candidates are smart about asking questions about a company’s financial future, he emphasized: “Every single hire asks me ‘What’s your valuation?’ ‘How much money do you make today?’ ‘How many customers do you have?’ ‘What’s your revenue plan?’”
That’s not to say that a low valuation is the answer either, since that triggers different recruiting problems: “When the valuation is low…it may be tougher to convince a prospective employee that the value actually will go up in the future,” said Jeff Fluhr, Craft Ventures cofounder and partner via email.
"Valuations are promises, not just a number,” said Katelin Holloway, Seven Seven Six founding partner.
This tension highlights the fevered search for a sweet spot, where everyone (prospective employees included) feels comfortable with the startup’s room-to-run.
But, in the end, even the extent of a company’s potential comes down to a matter of perspective.
Because like beauty, valuation is in the eye of the beholder.
See you tomorrow,
Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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This story was originally featured on Fortune.com
