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2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price i
by twoodfin 4y ago
2) Most VCs (and founders) hate down rounds. So a lot of existing companies are stuck because they previously raised at $X valuation, and now the market price is $0.75X, and either the VC doesn't want to push for a down round or a founder won't accept it, or both.
They discussed this phenomenon at length on a recent Odd Lots podcast, and I can’t understand it as anything but a market inefficiency that some smart VC firm will eventually exploit. Values (and thus prices) go up and down. Putting your head in the sand about it can’t be a winning investment strategy.
- lpolovets 4y agoI agree, I think this is an inefficiency. But it's a tough one to correct because startups are a repeated game, and everyone's worried about upsetting people they'll have to keep playing with. I think the logic is "I like this company, but if I offer a down round then will I piss off their existing investors? Will those investors stop sharing good investment opportunities with me? ... Ah screw it, I'll just skip this down round and focus on other prospective investments." I think multi-stage investors are probably best-positioned to address this, since they are both new and existing investors in the companies they back, so they should be able to offer market price down rounds for companies that are still promising but unable to attract external capital.
- singron 4y agoDown rounds are bad for employee morale too since it puts previously issued options below water. It's probably worth it to re-issue equity, but that's messy and a lot of companies don't do it.
- icedchai 4y agoAt a previous company all of the employees (there weren't many left) demanded options be repriced. They were. Unfortunately, they still were worthless when the company was "acquired" in a fire sale.
- bombcar 4y agoWhich is why nobody likes down rounds, as it's indicative of where everything is going (and so the music stops).
- icedchai 4y agoYep. But when your startup is burning through cash and you're not going to make next month's payroll, you're pretty much force to accept whatever terms you're offered. (Assuming you're offered any.)
- swyx 4y ago> Values (and thus prices) go up and down. you might be underestimate the importance of narrative in a startup. a startup takes a tremendous amount of belief to will into existence, and a lot of belief depends on an unbroken narrative. to most outward folks, a startup generally wants to appears to be continuously crushing it - people understand that there are ups and downs, but generally have no patience for a "well we had a slow 3 years where we made a lot of mistakes" nuance. if you doubt this, consider how you eval a startup when joining as an employee, much less as an investor.
- twoodfin 4y agoRight, right, but fundamentally that attitude is irrational. If startups with actual long-term value are going under for want of $N million in a down round, that represents a big opportunity for anyone who can successfully combat the “narrative”.