The Damaging Psychology of Down Rounds

Both Sides of the Table

” In the article I discussed the downside of raising capital at a too high of a price and referred people to a previous article I had written encouraging founders to raise “ At the Top end of Normal ” as opposed to stratospheric prices. “Whenever I hear advice about pricing a round too high for the next round, I can’t help but think: well, if the choice (ceteris paribus) is between. The Damaging Psychology of Down Rounds.

Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

I have two simple rules for founders in my head from this experience. This is a little tricky in early rounds and with modest up-round financings, as you’ll often have a liquidation preference that is high relative to your overall valuation. Then, if you end up doing a down round, it suddenly matters a lot. Don’t worry about this too much, until you do a down round. Then use the down round to clean up your preference overhang.

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Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

A Recently Exited Founder on Surviving the Contradictory Role of Startup CEO

View from Seed

This is a guest post from Rob May , a co-founder and CEO of Backupify , which raised $19.5M I called the recruiter running the search and told him I was going to step down and hire a CEO. Hang out with other founders and CEOs. Other CEOs are the only people you can sit down and talk with about the hardest parts of your job. Sometimes the only path forward is to fill a gap with a down round of funding, a B-player, or some other non-ideal option.

Current Startup Market Emotional Biases

Feld Thoughts

Fred Wilson’s daily post referred to the article in Don’t Kick The Can Down The Road. “Many Unicorn founders and CEOs have never experienced a difficult fundraising environment — they have only known success. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Their own ego is also a factor – will a down round signal weakness?

Why is there such a large founder to early employee equity drop-off? - Quora

www.quora.com

Type to Add and Search Questions; Search Topics and People Startups Startup Compensation Entrepreneurship Compensation Stock Options Major Internet Companies Silicon Valley Why is there such a large founder to early employee equity drop-off? It seems pretty common for founders to get an order of magnitude more equity than the first employees, even if the employees joined pretty early. The real question here is: why is it fair for founders to get so much more?

The Resetting of the Startup Industry

Both Sides of the Table

If you raised money in the past 2 years and have grown it is possible that your next round valuation might be flat (or lower) even though you have a higher revenue because investors may value your multiple differently. If you can get a round done at the price you expect – well done. Don’t assume that you can “just do a down round” if necessary. Down rounds are corrosive. Founders hate them because they’re dilutive.

How to Talk About Valuation When a VC Asks

Both Sides of the Table

What was the post money on your last round (and how much capital have you raised)? It’s not uncommon for a VC to ask you how much capital you’ve raised and what the post-money valuation was on your last round. I know that some founders feel uncomfortable with this as though they might somehow be sharing something so confidential that it ultimately hurts you. A second thing a VC may be trying to determine is whether your last-round valuation was significantly over-priced.

Sensitivity Analysis key in startup financial projections

NZ Entrepreneur

The statistics show that even though most founders bet their time and resources that their startups will be the best in the world, 90% of those new startups won’t be in operation in 10-15 years. Founders are typically ambitious when projecting sales volumes.

Sales 60

Seed investment negotiation mistakes

NZ Entrepreneur

For some founders, negotiating a seed investment can be difficult. The following highlights some ways founders sometimes trip up in negotiating an early investment round, resulting in a deal they are unhappy with, a tainted relationship with the investor, or losing the deal altogether.

Fundraising advice: Don’t over optimise on terms

The Equity Kicker

Everyone loves a high valuation and it’s natural for founders to want to minimise dilution. They will most probably go on to raise multiple rounds of venture capital after all. Valuations are something quantitative for founders to measure themselves on, and there are lots of investors willing to pay high prices, so they don’t always listen. And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round.

Take advantage of the good times to build stakeholder loyalty.

Berkonomics

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO. That one hurts early investors and founders more than perhaps any other action by investors. Loyalty is a hard-earned commodity. There are several times when stakeholder loyalty is tested to the limit.

Bad Notes on Venture Capital

Both Sides of the Table

We raised a seed round. You’ll find out the minimum when the next round is raised. At an accelerator … Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. How will you price the next round? Your A round?

Small Investors

ithacaVC

Founders often raise money from friends and family and other angels. The treatment of the friends, family and angels (FFA) as the startup matures and raises larger rounds of financing over time is interesting. And sometimes founders want to protect the financial interests of FFAs. Or the economy tanks or stock market tanks moving valuations down at inopportune times for the startup. It is highly typical for a startup to have small investors on its cap table.

Three Startup Financing Myths You Should Avoid

YoungUpstarts

I always caution entrepreneurs not to take too high a valuation in any round because it sets very high expectations for the next round. A down round, which can damage a company and make it difficult to raise money in the future.

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

So why the slow down all of a sudden? 61% of VCs said valuations were “marginally down” in Q4 of 2015 but 91% expect price decreases in the next two quarters. If median valuations are down massively, later-stage investors are staring at their trading terminals and fund-raisings are taking longer – of course companies must cut burn rates. Most flat rounds. More down rounds. More structured rounds.

LP 202

Think ahead when raising your early investments

Berkonomics

If so, the VC will contemplate a “down round” – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier. No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation. How did you structure your first round? .

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

Amongst the most often asked questions I get from founders is, “How much money should I raise?” Reflexively founders want to raise as much money as they can because they figure it will give them more resources, better chances of competing and a longer runways before they have to do the often painful job of asking, yet again, for money. I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5

Changes in the Venture Capital Funding Environment

Both Sides of the Table

In other words, it isn’t that VCs suddenly got smart, it’s that the costs of starting a company went down dramatically. I Leaderless Rounds. With a massive increase in companies created and a huge number of sources one trend that we witnessed from 2012–2015 was the rise of the undisciplined round. Non VC Growth Rounds. The market eventually slowed down. Some examples There was an A-prime round of a high-profile deal coming together.

A Cap is not a Valuation

Bryce Dot VC

As we hunted for those overlooked gems or misunderstood breakthrough ideas a common theme emerged among the founders stuck in the Series A gap. Most had structured their seed rounds as bridge notes (a fancy term for a loan) that would convert to equity when the anticipated future round of funding closed. The problem we began to run into was that founders believed that these caps were actual valuations.

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

The Second VC Round – A True Test of Scalability

Scalable Startup

The Second Round, or “B Round”, or “Follow On” round can be the achilles heel of a startup. No doubt the first round of external funding for a startup is usually critical to a startup as it can be the difference between continuing your startup or shutting it down. But it’s a different milestone than the second round of funding. The second round, however, is based more on cold hard facts. Founders Fund.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

I’ve decided to take all of my private conversations and subjective points-of-view on the topic and make them public in a keynote speech at the Founder Showcase in San Francisco on June 15th. If you invested in the first angel round of a startup company it is usually very hard to sell your stock – usually for many years if ever at all. So rounds tend to be “range bound&# where the top end of the valuation spectrum often being done in boom markets (i.e.

Venture Capital Q&A Session

Both Sides of the Table

The A round was done in February 2000 (end of the bull market) and my B round was done in April 2001 (bear market). As a result I had to do a down round. Down rounds are psychologically really difficult on companies and can make it harder to do later rounds. But most importantly I lectured founders that you can’t avoid the admin of setting up your ESOP.

How NZ entrepreneurs can up their capital raising game

NZ Entrepreneur

I personally funded my first ventures, then led the two rounds that have seen Ambit take in $2.2m If a valuation is too low, the founders become over-diluted over time and will struggle to do a later series A or B raise if they’re sitting at single digits – global venture capitalists (VCs) won’t touch this scenario. And importantly, each round needs to be an increase on the last, so investors feel like their investment is winning and share the news or hopefully re-invest.

A Primer on Angel Investment ‘Simple Term Sheets’

Startup Professionals Musings

The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

Unicorpse

Feld Thoughts

Some will demonstrate strategically justifiable metrics and have fantastic ‘up round’ exits; others may see liquidation preferences kick in which will negatively impact founders and employees; others may fulfill the adage “IPO is the new down round” , which has been the case for more than half of the public companies on our list. The current usage of the word unicorn makes me tired.

A Year of Reckoning for Angels and Seed Funds

A Crowded Space

The majority of the seed companies they funded went on to raise later rounds at often big markups. We expect there to be an increase in down rounds, flat rounds, inside rounds and various pay-to-play scenarios. This is the year that every founder is talking about getting to cash flow breakeven and controlling your own destiny. These inside rounds will lead to one of a few possibilities: 1) No insiders are supportive. These companies shut down.

An Inside Scoop on the Funding Environment and What it Might Mean for You

Both Sides of the Table

Investors sat with the founder & CEO, Jason Spievak, and asked him what he wanted to do about the future. Six firms had expressed strong interest, two had strong champions already trying to test price and round size and one had made it clear they were planning to submit a term sheet the following week. With “uncertainty” taking hold, rounds were taking longer to complete. $30 million. That’s how much Invoca raised and we’re announcing it today.

Startup Valuations – Again….

ithacaVC

This morning I was reading one of my favorite daily compilations of articles (called Innovation Daily, subscribe here ) and came across another great short article on startup valuations called “ Seed Rounds: How to Pick a Valuation “ Joseph Walla, who I don’t know, wrote it. If you are advising startup founders, I strongly suggest having them read all 4 of the posts to get the lay of the startup valuation land. Don’t risk a down round.

The Future of Startups 2013-2017

Scalable Startup

So let me maybe start with sort of – top-down and bottoms-up is how we think about it, because both are important — so let me start with historical context and then maybe go to the stuff happening right now. And so it has always been this kind of trickle-down model for 50 years. Alexia Tsotsis: It’s grassroots versus trickle-down. Marc Andreessen: Versus trickle-down. I mean, we have been trying to take down mostly good companies.

Wasted time is money lost.

Berkonomics

It is not a strong bargaining position for the CEO to ask for money to complete a product promised for completion with the previous round of funding. And professional investors often penalize the company with lower-priced down rounds or expensive loans as a result. Close. There is a relationship between time and money that is more complex than most managers think.

What is actually happening during a VC slowdown?

This is going to be BIG.

Fear, not surprisingly, weighs markets down. They might have to get another round in, and that round will most certainly be a down round. They might be doing board meetings more frequently, coaching first time founders through layoffs and debating with their partners which companies they should bridge until things thaw out. If you're a founder fundraising this year, that means spending more time getting VCs comfortable with the risks of your company.

What is the Right Burn Rate at a Startup Company?

Both Sides of the Table

by Michael Woolf that is worth any startup founder reading to get a sense of perspective on the reality warp that is startup world during a frothy market such as 1997-1999, 2005-2007 or 2012-2014. ” Stay lean and only raise a big round if you DO find product / market fit and which point you want to loosen the belt quickly and raise the capital to do so. Of course a lot of this also comes down to investor trust.

Startup Funding – A Comprehensive Guide for Entrepreneurs

ReadWriteStart

I have interacted with a lot of founders who funded their initial business expenses through credit cards. Point number 1: You must understand that funding is a business transaction between the investors and the startup founders.

What I *Would Have* Said at TechCrunch Disrupt

Both Sides of the Table

And people like Jeff Clavier, Aydin Senkut, Dave McClure, Chris Sacca & Eric Paley (at Founder Collective) are leading the charge. Chris Sacca talked about how a $20 million exit can change a founder’s life and that shouldn’t be scoffed at. I used an analogy I heard from Michael Dougherty (founder of Jelli) recounting what First Round Capital told him, “sometimes you’re on the local train and sometimes you’re on the express train.

Think ahead, if you will need more money later.

Berkonomics

If so, the VC will contemplate a “down round” – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier. No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation.

A Notable Omission

Bryce Dot VC

In Bill’s world, ALL involved in the Unicorn market include Founders, Employees, Investors, LPs, even Sovereign Wealth Funds. If you read this post your takeaway might be that founders egos are crushed, employees options are worthless and Investors have very difficult conversations with their LPs. Or, that getting customers are a necessary evil for getting off the fundraising treadmill that investors are incentivized to keep founders on?

On the Road to Recap:

abovethecrowd.com

All Unicorn participants — founders, company employees, venture investors and their limited partners (LPs) — are seeing their fortunes put at risk from the very nature of the Unicorn phenomenon itself. John was the first to uncover that just because a company can raise money from a handful of investors at a very high price, it does not guarantee (i) everything is going well at the company, or (ii) those shares are permanently worth the last round valuation. A down round is nothing.

Does your business need money? Read this!

Berkonomics

Some businesses require very little capital and the founder can self-finance the enterprise and retain 100% of its ownership and control from ignition through liquidity event (startup through sale). I’ve arrived at a significant number of companies that were looking for additional growth capital after a “friends and family” round, and had to “clean up” the cap table more than a few times over the years.

Keep Term Sheets Simple for Quicker Cash to Spend

Gust

The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

Create stakeholder loyalty when times are good.

Berkonomics

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO. That one hurts early investors and founders more than perhaps any other action by investors. The message here is simple. There are several times when stakeholder loyalty is tested to the limit.

Sustainable startup growth and venture capital

The Equity Kicker

However severe our current situation is, I’m sure there will be plenty of short term negatives, including more job losses, company failures and down rounds. That means much less blitzscaling (whatever the heck that ever was), and lots more heads-down quality thinking to build products that customers actually want and will eventually pay for. I think that’s why you see people like Bill Gurley, Fred Wilson and Mark Suster publicly talking markets down.