Jeremy Liew, a partner at Lightspeed Venture Partners, wrote an insightful post pointing out that taking money at a high valuation entails a much higher risk for an entrepreneur than taking it at a lower valuation. With a lower valuation, there's always a chance at making it up on future rounds. But with a valuation that's overblown, the risk of an eventual down round may scare off future investors.

I'll go even further. I think there's also a macro risk that faces a sector when valuations get too high. Even with a reasonably valued company, if "valuation creep" occurs, an investor must decide whether or not to meet the entrepreneur's expectations and risk the investment if the factors driving the valuation creep disappear.

This was the dilemma some communications players found themselves in during the '90s. Good companies with solid prospects that couldn't sustain themselves at the inflated valuation died or went bankrupt after being unable to raise more money. Through the course of the late '90s, even those with reasonable valuations were dragged into the fervor.

Artificially high valuations can set up an entire industry for a fall, not just an investor. It's unlikely that an individual entrepreneur — or its existing investors — have the discipline to resist such inflation. It's also possible that taking the seemingly more sensible course advocated by Liew in a market with inflation creep might violate the fiduciary duty the company and its investors hold to their respective shareholders. After all, if a company can exit at an excessive valuation, its shareholders would clearly benefit. —Stacey Higginbotham

See post from Lightspeed Venture Partners