Capital Market Climate Change

Ben's Blog

Perhaps you are caught in the “Series A crunch” or perhaps you are a consumer company and expected that you would be valued on users rather than revenue like the last time. 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. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

CES Quote of the Day - "We Will Be Very Supportive Of Your Down Rounds This Year".

Seeing Both Sides

Although attendence was down, it is still an insanely large audience of 130,000 attendees and 2,700 companies. CEA head Gary Shapiro reported in his keynote that industy sales were up over 5% and that 2009 will be flat or slightly down. He was probably just grumpy from the miserable results Intel announced to Wall Street the day before, with an unheard of 23% forecasted drop in revenue. But Intel Capital will be happy to invest in their down rounds

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Grow or Die – - Revenue growth must be the core strategy and drive all other strategies.

Scalable Startup

And by growth I mean revenue growth. Flat to negative revenue growth is a real red flag, especially for early stage companies. If you’re venture funded, things get kind of ugly -unhappy board members, cut off from communications, down- rounds to keep you going, or no more funding. Those are all nice and should be designed impact revenues, but usually aren’t a real measurement (unless you’re Twitter).

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. The days of easy money may be slowing down.

What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

And two big changes have happened that are widely known – in the past quarter the value of some very high profile companies such as LinkedIn and Twitter have fallen substantially plus Fidelity (usually a public market investor) has written down the value of many of it’s later-stage private-company investments and made the downward valuations known. ” “Mark has a vested interest in talking down valuations of startups.” Why Inside Rounds are Difficult?

Sensitivity Analysis key in startup financial projections

NZ Entrepreneur

For example, “How will unit cost affect our capital requirements and how will product pricing affect revenue?” It isn’t good enough to just say ‘what does halving my revenue do to the business?’ No one can predict the future and it’s especially true in the startup world.

Sales 60

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?

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.

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

View from Seed

I called the recruiter running the search and told him I was going to step down and hire a CEO. Rob,” he said, “no offense, but you aren’t going to get a world class, been-there-done-that CEO into a company with less than $1 million in revenue. 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.

Three Startup Financing Myths You Should Avoid

YoungUpstarts

When a VC’s website says they do “early stage” – to a VC that means a product has already been built and generating some revenue, while to an entrepreneur it means “just an idea.”. A down round, which can damage a company and make it difficult to raise money in the future.

What is the Right Burn Rate at a Startup Company?

Both Sides of the Table

So if your costs are $500,000 per month and you have $350,000 per month in revenue then your net burn (500-350) is equal to $150,000. But those of us with longer memories remember that the revenue line can move south very quickly when the market overall turns south. You are particularly vulnerable if: You have revenue concentration (few customers each providing a large total of percentage of your revenue). Of course a lot of this also comes down to investor trust.

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

Both Sides of the Table

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. Investors had grown too used to the idea that any deal you funded would get marked up to a higher valuation in the next round and that’s clearly not always true. $30 million.

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. A founder is about to raise their first round and asking me how to value their company. [1]. Funding lets you invest in growing your company faster than revenue growth would normally allow.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

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. Ah, but you say that for a normal-sized angel check or A round check one shouldn’t worry about the ultimate exit because he or she is getting in really early and at a cheap enough price so who cares whether one pays $5 million pre-money or $15 million pre-money – you just have to make sure you back really big companies.

How NZ entrepreneurs can up their capital raising game

NZ Entrepreneur

Soon after that first investment, I started my first business, and am now on my fifth (all $1m+ in revenue, but not all ‘successful’). I personally funded my first ventures, then led the two rounds that have seen Ambit take in $2.2m 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.

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. People buy companies for 3 primary reasons: 1) they want the management team / talent 2) they want the technology or 3) they want the market traction (revenue, customer base, profits, etc).

Wasted time is money lost.

Berkonomics

Although young companies rarely measure profitability this repeatedly, more mature companies usually can bring from five to ten percent of revenues to the bottom line in the form of net profit. 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.

Premature scaling at Series B

The Equity Kicker

It all comes down to probabilities in the end – anyone can get lucky – the trick is getting a handle on how lucky your plan requires you to be… The article describes how it goes wrong in two ways, firstly: Your company is growing and scaling well, often on little invested capital. To meet growth and revenue targets, you hire and spend like never before. PandoDaily has an article up entitled The Series B trap , that’s about the dangers of premature scaling.

Startup Funding – A Comprehensive Guide for Entrepreneurs

ReadWriteStart

The primary source of your funds should be your paying customers, i.e., your business should generate enough revenues and profits to fund the growth and expansion. These usually play a role in the very early stage of your business, primarily pre-revenue.

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. I once was on the board of a company that had generated lifetime revenue of $1.5m The current usage of the word unicorn makes me tired.

How do VCs measure their success (and why you should care)?

Hippoland

Primarily these things: Companies dissolvingCompanies exitingCompanies raising equity rounds All of these events are concrete events that attach a numerical value to a company. And, lastly, when companies raise an equity round, there is another investor who has (in theory) done due diligence and assessed that a company is worth a certain amount. If a company raises a good round, it gets marked up to the new value. And if a company takes a down-round, it gets marked down.

IRR 48

Lean Startups aren't Cheap Startups

Steve Blank

The Price of Mistakes are Inversely Proportional to Available Capital In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes – i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?

Lean 233

Does your business need money? Read this!

Berkonomics

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. It is most common to greatly overprice such a round of financing, valuing the enterprise well above what it may be worth at the moment for friends or related investors who do not have the sophistication or willingness to challenge the valuation.

On the Road to Recap:

abovethecrowd.com

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 high performing, high-growth SAAS company that may have been worth 10 or more times revenue was suddenly worth 4-7 times revenue. With the public markets down, these groups began writing down Unicorn valuations.

What I *Would Have* Said at TechCrunch Disrupt

Both Sides of the Table

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. The express train represents raising a large VC round before you’ve figured out whether you can be big.&# I agree. But it also hurts entrepreneurs – Mike asked people about what they were doing to keep prices down.

Ten Deadly Sins of Writing a Business Plan to Raise Capital

Business Plan Blog

If you are pre-revenue then it will be difficult to portray market traction unless you have the budget to conduct customer surveys. Practicing Top-Down Sales Forecasting. Top-down sales looks at the overall market and uses this information to identify your company’s projected sales, typically as a percentage of the market. Investors want to see a growth/revenue model that uses sales data and assumptions that predict sales by product and region.

NDA 58

Startup Fairy Tales and Other Tall Tales That Venture Capitalists Tell

Growthink Blog

This venture capital financing - usually between $3 and $10 million - is the first of a number of rounds of outside investment over a period of three to five years. With this capital, the company propels itself to $50 million+ in revenues, and to either a sale to a strategic acquirer or to an initial public offering. First, look for " one and done " financings - companies that need just one round of outside capital to propel them to positive cash flow.

Bad Notes on VC

Gust

We raised a seed round. You’ll find out the minimum when the next round is raised. 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. Him: But when I raised my first round we didn’t know how to price the company. How will you price the next round?

On Bubbles … And Why We’ll Be Just Fine

Both Sides of the Table

Ah, but today’s Internet companies have real revenue! And so on down then line. New investors hate down rounds. So I’m not advocating panic or a need to rush your funding round. This post originally ran on TechCrunch. I recently spoke at the Founder Showcase at the request of Adeo Ressi. I asked what the audience most needed to hear.

Venture Outlook 2016

Both Sides of the Table

“Trade in an asset at a price that strongly deviates from an asset’s intrinsic value” The arguments against that, “This time the startups have real revenues!” On the chart below, 78% of the rounds of 80 $1bn+ companies were led by non VCs. Here is a chart to show you the median valuation of late stage private tech companies compared to traditional growth rounds of capital led by VCs and also vs. the public markets. 25% “down rounds?

LP 327

To Follow On or Not to Follow On

This is going to be BIG.

In the late 90's, it wasn't surprising that companies with no revenue that were funded at 100 million dollar valuations didn't survive. That wasn't a bubble bursting issue--that was a poor financing strategy issue of people getting caught with their pants down, hands in the cookie jar, and all the metaphors you can think of at once. I haven't negotiated to get my way into $18mm funding rounds with huge checks--so I'm simply not going to do that. Down from what?

Are Investors Being Unreasonable? - Startups and angels: Along the.

Tim Keane

"  The problem has been that too-high valuations and too generous terms have spawned painful down rounds that squash the entrepreneur and his early investors.    New money, usually VC money, comes in and crams down those early investors and takes substantial shares from the entrepreneur.  up to $10MM in revenue.  up to $10MM in revenue.  Startups and angels: Along the way to success.

Wasted time is money lost. (And another story of lost opportunity.)

Berkonomics

Although young companies rarely measure profitability this repeatedly, more mature companies usually can bring from five to ten percent of revenues to the bottom line in the form of net profit. 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. There is a relationship between time and money that is more complex than most managers think.

In Venture Capital, Should You Be a Momentum or a Value Investor?

David Teten

Likely signs of a Momentum investment: the round is oversubscribed and the entrepreneur has more negotiating leverage than VCs during the closing process. . Likely signs of a Value investment: the company has challenges in filling out the round; the investors have more negotiating leverage than the founders during the closing process; the company has significantly better metrics (e.g. LTV / CAC, revenue growth, etc.) That’s where the logic falls down.

Capital Market Climate Change

Ben's Blog

Perhaps you are caught in the “Series A crunch” or perhaps you are a consumer company and expected that you would be valued on users rather than revenue like the last time. 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. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

Shark Tank Season 4 week 4 breakdown

Lightspeed Venture Partners

This time I’ll break down week four of this season. Lori quickly pointed out some problems with the product; it will be hard to move down stairs and it doesn’t wheel easily. They won a design award at a trade show, but have no revenue and no orders. As Cuban pointed out, this is a “down round” Zomm is seeking $2M for 10% of the company, implying an $18M pre money valuation today.

Raising money for your business: What are the options?

Berkonomics

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. It is most common to greatly overprice such a round of financing, valuing the enterprise well above what it may be worth at the moment for friend or related investors who do not have the sophistication or willingness to challenge the valuation.

The Collapse of the VC Ecosystem & What It Will Look Like Post.

Altgate

Growth stage investors are usually the Series B or C investors who come in when the product is in the market but there is little or no revenue and the team is probably in the 20-something range with the goal to ramp it up to 40-50 employees with the new money, build out a sales team, etc. Later stage investors typically put money into a company once it has crossed the chasm with at least one product and achieved a $10 million+ revenue run rate.

How to Fund a Startup

www.paulgraham.com

A typical startup goes throughseveral rounds of funding, and at each round you want to take justenough money to reach the speed where you can shift into the nextgear. Lets start by talking about the five sources of startup funding.Then well trace the life of a hypothetical (very fortunate) startupas it shifts gears through successive rounds. There never has to be atime when you have no revenues. Why waitfor further funding rounds to jack up a startups price?