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I raised my A round at a $31.5 million post-money valuation with no revenue. We had companies pitching us that had almost no revenue at all and they were raising $10-15 million in capital at a $40-50 million pre-money valuation. Another firm we saw tried to raise $15 million at a $60 million pre-money with similar metrics.
Him: But when I raised my first round we didn’t know how to price the company. There were no metrics. How will you price the next round? Your A round? Him: On metrics. Revenue multiple? If we priced it based on any metrics your company would likely be worth less than 7 figures at your A round.
They raised at $40 million pre-money for pre-revenue companies and when the economy corrected it became hard for them to refinance themselves. If either condition doesn’t hold it will be hard to do anything but a flat or downround. We saw this with VC backed companies in 07/08.
Him: But when I raised my first round we didn’t know how to price the company. There were no metrics. How will you price the next round? Your A round? Him: On metrics. Revenue multiple? If we priced it based on any metrics your company would likely be worth less than 7 figures at your A round.
A high performing, high-growth SAAS company that may have been worth 10 or more times revenue was suddenly worth 4-7 times revenue. Also, they have a strong belief that any sign of weakness (such as a downround) will have a catastrophic impact on their culture, hiring process, and ability to retain employees.
The burden [should] just be that we care; that if we learn something, we improve it, and that we don’t only use single output metrics and its growth at all costs. But now our hosts are really angry, and they have a huge revenue shortfall. And I made a decision not to do an equity round, because I thought it would be a downround.
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.
There are a lot of people that artificially group together performance metrics for venture, and try to extrapolate successful stratagies from it. 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. Down from what? Do what you're good at.
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 downround” , which has been the case for more than half of the public companies on our list.
The burden [should] just be that we care; that if we learn something, we improve it, and that we don’t only use single output metrics and its growth at all costs. But now our hosts are really angry, and they have a huge revenue shortfall. And I made a decision not to do an equity round, because I thought it would be a downround.
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 A simple metric – when I registered my first company in 2004, the naming space was wide open.
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.) were clearly Momentum, but [in hindsight] they were also Value.”
Downrounds are coming. David Sacks offers a few benchmarks on growth rates (revenue), gross margins, CAC payback and burn. If they’re down 60%, there’s a good chance you’re in a similar position. Source: Pitchbook NVCA Venture Monitor. Fundraising will get tougher. Startup founders should adjust expectations accordingly.
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