Who, What & Why

Valuation is not a linear path or a form of computation. You don't just add elements together and manifest value—that can happen, but it's far from the only way. Valuations instead represent an ever-changing, complex set of strategies designed to generate benefits for skilled players, often at the expense of less skilled players.

The various strategies and tactics we use to alter perceptions as a means to alter value are Valuation Games. These are back-and-forth exchanges where players work to raise or lower their own personal value and the value of assets under their control.

Why We Play

My primary thesis is that we're all playing Valuation Games all the time, with our assets and with our identities. Although the reasons are many, for our purposes the primary culprits are:

  • There are only so many genuinely valuable assets in the world. High-value assets are scarce by definition, and they're mostly controlled by legacy players due to Matthew Effect-style feedback loops. Given there are so many more subprime than prime assets, an alternative strategy must be adopted by the players with subprime assets who want to trade up.

  • Valuable assets often don't require much in the way of sales or marketing to become and stay successful. Objects of real value mostly sell themselves by attracting willing buyers once some baseline level of awareness has been established. However, that awareness is not a given: a subprime seller who knows how to manipulate their market can prevail over a prime seller.

  • The players who control the most valuable assets have very different strategic needs than those who don't. They know what they have on their hands, and are wary of outsiders. However, they can't stay static forever. They are interested in expanding their pools or at least defending them, which creates openings for those beyond the gates. This is dilemma between expansion and protection of their pool is at the heart of all Valuation Games.

All of these factors combine to create situations where information asymmetry and conflicting incentives mix in a complex landscape of strategic interactions. In many cases, the winners are not those who bring the most real-world value to the table. It's instead the most skilled players of Valuation Games who prevail.

Who Plays

Those who control pools of resources are what I call Commanders, and those who don't I refer to as Contenders. Their perspectives inform the types of Valuation Games they play and how they play them. Although they occupy very different positions in the overall metagame, they are interconnected in a complex dance of risk-reward tradeoffs.

In any given Valuation Game, there is a buy-side player and sell-side player and some kind of sales pitch. This leads to a variety of different game archetypes:

  • Sell-Side Contender & Buy-Side Commander - Standard examples: Entrepreneur pitches to a venture capitalist for seed capital. Potential employee pitches an employer for a job.

  • Sell-Side Commander (Weaker) & Buy-Side Commander (Stronger) - Standard examples: Hedge fund manager pitches to a family office in order to raise a fund. Private equity firm pitches a portfolio company to another PE firm.

  • Buy-Side Contenders & Sell-Side Commander - Standard examples: Politician pitches a policy to their constituents. Ecommerce business pitches a product on Amazon.

What role a player occupies can shift based on context. For example, fund managers are in a dominant Commander position when they deal with businesses and people who want their money. But the power dynamic changes when they pitch their limited partners, who have more capital than they do.

How We Play

The way a particular person or organization plays a Valuation Game depends on their position within the game, the leverage each players brings to the table, and the information asymmetries between the two.

Consider the classic example from the previous section, where an entrepreneur Contender pitches a venture capitalist Commander in order to raise money.

The entrepreneur's primary Valuation Game strategy is to make themselves and their company look as valuable as possible. They want to focus the venture capitalist's attention on the positives, and minimize or outright hide downsides. The more substance there is behind their company, the less they need to play these games, and vice versa.

The VC's strategy revolves around uncovering downsides and lowering the value of the entrepreneur's business in order to either decline or invest at a price they find acceptable. Like an attorney cross-examining an untrained witness, their job is to find ways to diminish value even if it's unjustified in reality. This gives them the optionality they want out of the situation at the expense of the entrepreneur.

Each plays a game of information concealment and discovery. VCs push to see every detail they can about the business to uncover any issues, and entrepreneurs will often go to great lengths to hide potential disasters. Time plays a role here as well, as the entrepreneur may be willing to uncover certain negative information after an investment is made—a situation the VC wants to avoid at all costs.

Leverage is also a key ingredient in this Valuation Game. If an entrepreneur has the makings of the next Facebook and they know it, the venture capitalist is suddenly on the backfoot. Optionality flows to the entrepreneur since they'll have a line of VCs ready to invest if the one in front of them refuses to.

However, that is not a common situation and, in most cases, the VC has the leverage and uses it to get their way in the deal. They're the ones with the resource pool, and the entrepreneur wants access to it—so the VC dictates the situation.

That's how the game in general tends to work: one side pushing valuations up, the other side pushing them down. In most cases, those not in control of resource pools are pushing up and those who are in control of resource pools are pushing down but that isn't always the case.


What happens if either side in a Valuation Game fails? An entrepreneur who cannot play Valuation Games effectively can only win in the long-term if they don't need to raise money. If they do need capital to start or expand their operations, failure means closing their doors. In the mind of a business owner, this means stakes are often life-or-death. However, their upside is enormous: a successful investment may translate into a significant fortune for them.

If a VC makes a poor investment, the consequences can cascade quickly due to the size of their resource pool. Losing money is part of the game, but they want to maximize their winners. An accumulation of too many losses in a row will ensure they lose the confidence of the limited partners who invest with them. Or, even worse, if they don't spot something criminally serious (such as fraud), they might find themselves in an embarrassing legal situation that costs them their career.

Because there's so much on the line, players on both sides of the game bend and break the rules. Although good players tend to stay on the right side of the law (or at least don't cross it enough to draw serious heat), some will resort to crime. It's not a stretch to say that the terms "crook" and "con artist" describe players who are Valuation Game experts, with the caveat that they don't deliver the goods once they win.

How far will someone go? Much of the time, money and effort expended in Valuation Games is dedicated to answering that question. Sell-side players may go the extra mile to build their own Potemkin villages, while buy-side players may spend months (or even years) investigating a player before engaging with them. All it takes is one mistake for either player and the game may come to a crashing halt.

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