I am a well-known valuation hawk. That is, I have often gone on the record as saying that investors should care about the valuation they pay when they invest in startups, and that valuations are too high.
This doesn't make me popular in many circles, but I care more about speaking what I think is the truth rather than popularity.
But the reason I'm a valuation hawk isn't just that I'm a cheapskate (though I most certainly am a cheapskate). It's that valuation is the universal lever for mitigating the risk of investing in startups.
I care about four things when I invest: People, Product, Market/Traction, and the Deal. The problem is, in early-stage investing, there's a lot of uncertainty associated with the first three terms.
You may think the startup has an awesome team, but how well do you really know the entrepreneur?
You may think the startup has an awesome product, but can you be certain the mass market will concur?
You may think the startup has identified an awesome market, but how do you know it will develop as planned.
It is true that if a company is wildly profitable and growing fast, things are reasonable certain, but this is almost impossible when it comes to seed-stage companies.
Therefore, no matter how you try to mitigate risk, there is only one lever that is absolutely reliable: Paying a lower price for your investment.
I don't think I'm smart enough to pick all winners. If I were, I wouldn't care about valuation either. But I am smart enough to know that paying $X is better than paying $2X for an investment when it comes to generating a good return.