The High-Valuation Trap: Where Does Your Attention Go as Valuations Rise?

Entrepreneurship runs against human instinct in many ways. Many entrepreneurs chase high valuations, but a high valuation can itself be a major trap. Pursuing and trying to maintain one often leads a founder to make many poor judgments. A founder chasing a high valuation can drift away from the core of the business in both thinking and decisions. During the capital glut of recent years, a company could command a high market valuation almost as soon as it started—even higher than many listed companies. Founders might then think and act as though they already ran a large company, when they were only starting and perhaps had practically nothing. When a high valuation gives founders an inflated ego and the feeling that they run a large company, their attention and thinking can lose focus. As your valuation rises, you must demonstrate that the previous round’s valuation has been justified and answer to its shareholders. You must also establish that the current round’s valuation is reasonable and attractive to new shareholders, while thinking up an even bigger story and project for the next round. Focus becomes difficult. Too much energy goes into fundraising and valuation rather than products and customers. For the sake of the previous valuation, this round’s valuation, and the next round’s valuation, you make poor decisions, misguided arrangements, and inappropriate resource allocations.