| > 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. |
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.