Lots of public discourse in startupland these days about some irrationally sky high valuations being paid for relatively young companies. Is Quora really worth $400M? Is Pinterest really worth $1B? In general I avoid this type of chatter, but there’s a different conversation going on in private that I think is more interesting and worth highlighting.

Whether these companies are really worth the dollars being bandied about is actually not the question most are asking themselves; rather, the discussions among investors tends to focus on what if they’re actually not.

Let’s say we invest $40M in Quora at a $400M post money valuation. To date, Quora has only disclosed one $11M round of funding. Given they’ve raised their money from traditional VCs and a few savvy angels it’s probably safe to assume that they’ve sold those investors preferred shares.  And, it’s probably safe to assume that as shrewd investors we’ve done the same.

Why is this important?

Remember how preferred shares work. From Fred:

Preferred stock takes its name from a critical feature of preferred stock called liquidation preference. Liquidation preference means that in a sale (or liquidation) of the company, the preferred stock holders will have the option of taking their cost out or sharing in the proceeds with the founders as common stock holders. What this means is that if the value of the sale of the company is below the valuation the preferred investors paid,then they will get their money back. If the sale is for more than the valuation the preferred investors paid, then they will get the percentage of the company they own.

Back to our investment in Quora.

The floor has now been set on what Quora has to sell for in order for us to at least get our money back: our $40M Series B + $11M Series A = $51M. There may be other costs associated with a transaction, but those $51M in preferences will be paid out first. If there’s any more money around the table it will be divided based on percentages of ownership. If there’s any less, we lose our respective amounts below the $51M threshold.

The conversations that I hear happening around these irrational valuations is not whether the company is actually worth $400M, $1B or $1T, but what do they have to sell for in order to get investors their money back. In the case of Quora, that’s roughly $51M. 

How much risk do you think there is that a couple of guys who built and scaled Facebook couldn’t get picked up by someone, anyone, for $51M?

If you’re a VC looking to build brand and mindshare among entrepreneurs leading one of these irrational rounds is easy to rationalize. Worst case you get your money back, best case you’ve got the next Facebook.

I wrote a piece a while back bemoaning the state of government IT spending and shining a light on the absurd amount of waste baked into system that relies on an archaic procurement process which elevates a chosen few vendors to a cartel level of status. This strangle hold is one of the many choke points for waste that is killing our country. Much of this waste is perpetuated by people and processes that are utterly out of touch with the efficiencies and functionality of today’s modern technology.

But that’s beginning to change. Government, at every level, is being infiltrated by a new generation of thinkers and technology natives. Groups like Code for America have done a tremendous job in surfacing these people and working with them to implement codified change to the systems and data used to deliver services to their cities and towns. 

But Code for America is just one little non-profit and modernizing government is too big a problem and opportunity for just them. We need an army of founders, policy makers and government officials at every level to effect the needed change.

So, it’s with great enthusiasm that I’m taking part in the launch of Code for America’s new accelerator program which aims to attract early stage civic startups.

What’s a civic start up?

We see three models for startups that’d fall within the civic space: 1) they provide services on top of open government data; 2) they bring modern web technologies directly to governments; 3) they change the way citizens ask, get, or need services from government.

And what do companies receive who are accepted into the 4 month program?

• $25,000 grant. No equity, no strings attached.
• Monthly, week long, training and networking sessions in San Francisco.
• Office space in San Francisco, if you’re so inclined.
• Access to a mentor network of connected civic thought leaders, VCs and tech savvy gov decision makers.
• The Code for America press machine that can get your story in front of potential customers and partners.

This is a terrific opportunity for little companies looking to make a big impact on a massive market and gain an insiders edge against the incumbent IT cartel.

The stakes here are extremely high. We’re putting in place the systems and data policies that will shape our futures and those of our children. This is bigger than a procurement proces or incumbent vendors. As Alec Ross said recently:

the principle binary struggle of the 21st Century is not left or right, but open societies vs closed.

His statement applies to policies as well as technologies. How we respond will be transformative to both.

If this sounds interesting, exciting or irresistibly terrifying, I’d encourage you to

APPLY TODAY

The more I work with startups, the more I’m convinced that they rarely die from the things they do; rather, they die from the things they know they should, but don’t. 

Doing the wrong stuff is fixable. If your action isn’t getting the results you want you can always tweak it, or stop doing it altogether.

But, not doing never did anything. And not doing is the most deadly of startup sins.

Not saying no the the hire who isn’t a good fit because you just need. someone. NOW. Not firing them because you’re worried about a ship date, or what the team will say, or not wanting to be “that guy”. Not killing a product or project you know isn’t going anywhere. Not following up on leads. Not speaking up. Not trusting yourself enough to act when you know it’s the right thing to do.

The sins that require action are hard to ignore. Sins of doing the wrong things in the wrong amounts create friction and movement in one direction or the other.

But sins of omission move effortlessly. You’ll never even notice them.

Sins of omission are the silent killers of startups. 

It’s Foursquare day in NYC and in many other cities around the world. In celebration the company is trotting out some new user numbers and usage metrics. As of today, there are 20 million Foursquare users who’ve checked in 2 billion times. And both of those numbers are accelerating.

There’s a lot to say about a service we’ve watched grow from 30,000 members at the time we backed them to where they are now. But, one of the things that’s most impressed me is how much I’ve grown up with the service too.

What started out as a fun network for staying connected to friends whereabouts and competing for points has turned into something much more. It’s become a network where I shape places and, in return, they reshape me and the way I experience them.

One of the key insights the team made early on was that Foursquare should always be about more than a location, it should be about a place- a restaurant, a venue, an attraction, a home. Up until Foursquare, location had primarily represented dots on maps or geo coordinates.

But a place is more than a dot on a map. Places have faces and experiences attached to them. They have personality. Places serve the best espresso in town. They host first dates. They take on meaning to those who’ve shared time there. Some have actual addresses and some exist only on the network (hello Snowpocalypse!).

What Foursquare is evolving into for me is a service where places come to life. Pictures and tips from friends stay with a place long after they’ve left. Checkins lay the foundation, but every action in the network helps to unlock the power of place for everyone else. And when I leave a tip or a photo or simply just checkin, I’ve become a small part of that place and it me.

When we funded Foursquare it was just a few people around the table at 36 Coop. Though the team has moved on to a new location, their checkins, photos and tips have turned that address into a place. The same can be said of so many more places around the world.

So happy Foursquare day to the team and to the users who’ve helped location find it’s place.

In that Rudolph the Red Nosed Reindeer movie of my youth, there was a place where imperfect or unwanted playthings were sent called the Island of Misfit Toys. These were toys that the average kid wouldn’t fall deeply in love with right out of the box. They weren’t fit for placement under the tree on Christmas morning, so they were exiled to this distant island where they were dispensed nightly to children around the world who could appreciate any new toy- perfect or not.

I couldn’t help but think of the Island of Misfit Toys as a metaphor when reading the pendulum post yesterday. Amidst Jason’s effusive take on the current fundraising environment there is a cautionary tale for founders at the seed stage:

So a word to every other founder out there enjoying the current (and temporary) good times we all face. Times are good now but the trough of sorrow awaits. And it might hit us at a time when the macroeconomics of fundraising are not so founder friendly. 

and

When I look around at my friends that raised 12 months ago, I keep seeing the same thing. They’re down to a couple hundred thousand dollars and their product is doing well, but not gang busters.

So where are they? Are they ready for an A round? No, not really. They don’t have the metrics for it yet. So they need a bridge, then. Yeah, but bridges are really hard to get, especially when investors feel they overpaid for a tiny piece of equity in the seed round.

I believe those not so founder friendly macro economics are upon us already.

Call it a Series A Crunch. Call it a glut of good, not great, companies returning to a VC  market who’s expectations are much different than those at the seed stage. Call it VCs who’ve not the bandwidth or interest in working with used or imperfect playthings. Whatever you call it, the population on the Island of Misfit Toys is already beginning to swell.

Given that I’m a bit of a misfit myself, I think I’ll plan to spend more time there. I have a feeling I’ll find many perfectly wonderful toys there that just need someone willing to play with them.