[FreakLegion]

Obviously this is situational, but you expect a round of funding to carry you for about two years, less for Seed. When you raise at a favorable valuation, you have to grow into it, and the clock is ticking. Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.

There are a lot of early-stage startups out there right now that raised at silly valuations 6-12 months ago, already put most of that capital to work, and now have another 6-12 months of runway ... and zero leverage in fundraising discussions. The best time to talk to investors is when you don't need their money.

[xyzzy_plugh]

Sure, but was not raising money a better alternative at any point? It sure doesn't seem like it to me.

I feel bad for companies with runways ending in the next 6-12 months, of course, but that's life. If they hadn't raised funds 6-12 months ago, they'd likely be in a much, much tougher spot.

> Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.

I'm not sure in what universe an unfavorable round is worse than insolvency.

If you need to raise funds, you raise funds or die, realistically. No one knows what tomorrow brings. Anything else is trying to time the market.

If you didn't need to raise funds, but did... enjoy the privileged comfort of your war chest over the next few years.

[FreakLegion]

The choice doesn't have to be between raising and not raising. Seed rounds in particular are flexible, so you can optimize between raising at $Xm and Y% dilution. For example I raised seed money in early 2021 at $25m, but the highest valuation offered was around $32m. Why not just take the bigger number? Mainly because they wanted more of the company, but the higher valuation also comes with risk, and it wasn't worth a few extra bucks that I didn't need. I was happy with that decision a few months ago when the market was still at peak frothiness, and I'm doubly happy with it now.

> I'm not sure in what universe an unfavorable round is worse than insolvency.

An early-stage company already raising a down round and pressing on can very easily have a worse outcome than one that admits defeat and folds. You're just getting started, have years of hard work ahead, and things are already off the rails. The odds of success, low to begin with, have dropped precipitously. The business and the team are both on fire (existing equity grants blown up, employees ready to leave, lots of damage control needed). It's rough, and walking away is a legitimate alternative to buckling down for 5-10 years trying to save things.

[fauigerzigerk]

I'm not sure I understand. Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?

The only way in which this can possibly be true is investor psychology. In purely economic terms, having raised equity capital at what turns out to be a "silly" valuation is unconditionally good for the company and its founders.

The company isn't off to a bad start at all. Investors are off to a bad start.

[FreakLegion]

> Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?

Raising at a terrible valuation isn't the alternative.

It's easy enough to think through the mechanics of a down round:

* Why would a company accept a lower valuation at all? Desperation. They need the capital to continue.

* Is a desperate company going to get good terms? No, this is how you end up with onerous liquidation preferences, lose control of the board, get outside executives foisted on you, etc.

* What happens to the team? The company landed in this predicament by being overextended, so people will lose their jobs. Morale tanks, other people leave by choice.

* What happens to the stock? It loses a lot of value. Not only is the company worth less, but there's more dilution than a typical round (which gets compounded if existing investors have anti-dilution provisions). More morale issues. More people leaving.

On and on.

Not everyone who raised at absurd valuations will end up in this situation, naturally. If they didn't spend the money, they'll be fine. (If they raised on a SAFE where the "valuation" was really a cap, they'll just have to reset their expectations. It was never really a valuation anyway. If they misrepresented things to their team though they'll still have problems.)

It's the early-stage companies who took a bunch of money on an idea and spent most of it over the last year getting to a sellable product that are in trouble. They were only doing what they were told -- floor it, spend the money, build as fast as you can, raise more in a year -- but now things have cooled, they still need to find PMF and generate revenue, and while a year of runway might seem like a lot, it's blood in the water for investors.

[fauigerzigerk]

I don't disagree with you on the negative effects of a down round. But I'm unconvinced that it's worse than having to raise seed funding in a down market.

If you previously raised cheap equity capital (i.e at a high valuation) you have presumably used that money to create something of value (a product). Never having had that opportunity is strictly worse.

[FreakLegion]

Sure, it's not a universal law. We can imagine all kinds of scenarios where raising gobs of seed money at absurd valuations is the better choice.

We aren't discussing hypotheticals, though. We're talking about the actual seed landscape today, which to be clear is fantastic for founders, and the actual predicaments of a bunch of companies that raised in the last two-odd years at nonsensical valuations and are now forced to accept whatever investors offer (which in many cases will be nothing -- a down round is actually a luxury).

[alasdair_]

> I'm not sure in what universe an unfavorable round is worse than insolvency.

It’s worse in any universe where the choice is between insolvency now and insolvency later, because “later” can mean wasting a lot of time and burning bridges with investors that may end up funding your next business instead.

[xyzzy_plugh]

I chuckled at this. If it's a waste of time for you to be paid and to pay your employees...

If you think what you're doing is a waste of time, you can always leave. If it's your company, you can forfeit your shares. Why throw everybody under the bus? This is wildly irresponsible.

And burning bridges... I've never heard anything so funny. As if the feelings of investors ever really matter.

It takes a special type of entrepreneur to burn a bridge by taking an investor's money. Snubbing an investment is one thing, but taking an investment and using it as intended in good faith should never result in a burned bridge. Investors are typically understanding of changes in the market. It takes a party acting in bad faith, in which case not doing business with them in the future is reasonable, but that truth is applicable generally.

[alasdair_]

If you are certain that you are going to fail then it’s absolutely in bad faith to raise more money and it’s absolutely a waste of time for everyone involved.