[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).

[HWR_14]

Your not making sense. Normally a down round has negative consequences because of what it indicates. Here it indicates something different: they got a great deal in 2021.