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- Description
- Overview: A VC may choose to pay a higher price for shares in a company to win the deal. Also, the company may be running an auction for shares and price may be the determining factor in winning.
- Consensus vs Successful 2×2: When many VCs expect a company to be successful, it will drive up the price. Pay Up can pair well with using that price signal as a marker of quality.
- Single Deal or Over Time: GPs can use Pay Up for a particular company or for a period of time. Some GPs who lack conviction in a company will decline to invest in earlier rounds. They do so with a willingness to Pay Up for future rounds should the company perform.
- Combination: Pay Up pairs well with a Buying Logos portfolio construction strategy. It can almost be a Decision strategy, too.
- Benefits
- Increase Win Percentage – by paying more for shares, VCs will more often win the deal.
- Increase Visibility and Dealflow – when a VC is winning more often, they will win more deals. The increase in the deal count will attract attention and likely drive more dealflow.
- Aim for Consensus and Successful Quadrant – most of the returns from VC are from a small set of very high-growth companies. One way to identify high-growth companies is to watch the behavior of experts. The willingness of other VCs to pay a higher price may be a marker of investment quality.
- Trade-offs
- Winner’s Curse – the “tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item”.
- Lower Returns – by paying a higher price for shares, the VC will make less money than the counterfactual of paying a lower price. Although the investment has a chance of making more money than the counterfactual of having no investments. The relevant comparison depends on the quality of the company and the size of the outcome.
- Herd Mentality – The price signal may be self-reinforcing and not be a marker of quality. (“If your friends all jumped off a bridge…”)
- Description
