Down and Flat Rounds

spiral

There’s been quite a bit of talk on valuations over the past few months.  I think it began with Benchmark’s Bill Gurley’s April post On the Road to Recap.  The summer was a filled with similar news of flat or down rounds in highly-visible startups, including numerous unicorns. What prompted me for this post is the Ola news I saw today.

Whether valuations are spiraling down is a favorite topic of those chatting with VCs – I am not sure if this is schadenfreude or a genuine interest in what drives valuation trends – and I find myself repeating the same words when dealing with the subject: “It really does not mean much”.

The private valuation of a tech startup is the result of a complex equation with a very simple premise: the ultimate number satisfies the need of both parties at the table, the existing shareholders of the startup and the new VC.

In some situations the need is primarily cash. In that case the deal gets done at where the supply and demand curves intersect. In other cases, the company may want to maximize the PR from the financing, maybe get the coveted “unicorn” designation, and then the headline number becomes important.  The press loves lots of zeroes when reporting on startups.  As far as VCs are concerned, we can offer a startup any valuation, as long as we control the rest of the terms of the financing. That’s why the valuation is really less important than perceived.

Our advice to startups is to focus on just one coefficient when thinking of their business: the probability of success.  Of course, not running out of money is a critical factor of success so fundraising is very very important. However, the valuation is rarely the key factor in fundraising. I think it comes after:

  • Securing the right amount of funding to get your business to the next milestone
  • Partnering with the right investors
  • Making sure the company is able to focus on building its business rather than getting bogged down in fundraising-related bureaucracy or investor relations

In summary, as capital markets liquidity expands and shrinks with business cycles, there will be periods where we see valuations of subsequent rounds adjust accordingly.  I don’t think there’s much to read into in this phenomenon, other than noticing how the press can be distracting to entrepreneurs.

 

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