Rapidly Growing Valuations Shouldn’t Scare You Off

Naval: Good investors show their best deals to their friends, so one subtle type of social proof is when you see a group of investors who like to invest together. It means they’ve socialized the deal and it’s a hit.

There’s also the Peter Thiel rule: When a company’s valuation climbs rapidly between rounds, that should attract you, rather than scare you off, because humans are bad at calculating nonlinearities. That’s true as long as a credible or top-tier investor leads the round.

When you see a company’s valuation go up 5x in nine months, you might automatically think it’s overpriced. But that’s because your brain can’t handle the fact that a company might actually grow 10x in nine months.

It’s a highly negative sign when investors tell you to back a company that they aren’t backing themselves. Investors should not introduce companies they aren’t backing to other investors, even though sometimes naïve founders ask them for introductions.