5 Pros, and 5 Cons, to Taking a VC Round at a Very High Valuation

A whole lot of VC recommendation is a bit self-serving. Not essentially improper, however self-serving. Is elevating VC capital at a “too excessive” valuation a nasty factor, as so many VCs say? It’s blended.

There are dangers with a too-high valuation — but in addition advantages:

A excessive valuation isn’t essentially unhealthy.  It simply has risks.  We’re seeing a ton of that now with unicorns that raised at very high revenue multiples that now are unfundable.  However like many issues, it’s nuanced.

A excessive valuation has 5 core benefits for founders:

• Much less dilution. Not solely does this imply you personal extra, nevertheless it additionally means you’ll be able to promote extra later for a similar quantity of dilution. This can assist you “skip a spherical”.  Extra on that right here: The Pernicious Effect of Dilution in SaaS: The Cold, Hard, Bloody numbers | SaaStr; and/or
• More cash for similar dilution. This may be vital. Let’s think about you might be OK promoting 20% of your organization in a spherical. If that spherical is at $5m post-money, you get $1m to speculate. If that spherical is at $10m post-money, you get $2m to speculate. That’s quite a bit extra to speculate. Extra on that right here: Tier 1 VC is Great. But More Money May Be Even Better. | SaaStr
• Potential to boost a really, very lengthy runway.  Associated to the prior level, however generally nowadays, you’ll be able to increase sufficient capital to final 4-5+ years or longer.  Should you don’t spend all of it, that may massively derisk issues.  If — you don’t spend all of it and materially improve the burn fee.
• Secondary liquidity can get extra engaging (at later phases).  As your valuation goes up, VCs typically start to supply “secondary liquidity” to founders, i.e. the flexibility to money in some shares in a VC spherical.  At the next valuation, you find yourself not having to promote a lot of your place to generate some important money.  This may additionally massively derisk issues at a private degree.  However secondary liquidity at a valuation a lot lower than $100m usually finally ends up being a nasty deal in the long run.  Founders are likely to remorse it pretty rapidly as issues scale up.
• Signaling a winner / winner-to-be.  There are such a lot of startups right now.  Staff and others need indicators of who’s a winner — and who isn’t.  Fundraising isn’t the one sign, and it may be a false sign.  However it’s a sign in any occasion.  Most people need to be part of a confirmed winner, or not less than, a confirmed winner-to-be.

These are important benefits of a better valuation.  Don’t let anybody let you know in any other case.

However a excessive valuation additionally comes with important potential downsides:

• Doubtlessly, much more strain. Much more. Should you push an investor to pay greater than she is snug with, that comes with a price. Sky-high expectations. The expectation you’ll execute to perfection. Is that what you need? In excessive instances, it even form of places your job in danger as CEO. Should you push your traders to the max on worth, they’ll assume much more about in case you are the proper CEO. A bit extra right here: How to Avoid Being Replaced as CEO by Your VCs | SaaStr
• More durable to boost the following spherical, probably. Possibly even quite a bit more durable. That is what plenty of VC recommendation focuses on. Every spherical actually must be not less than 2x the valuation, and worth, of the final spherical to make the economics work (ideally greater). The upper the valuation, the upper the bar and burden subsequent time. A bit extra right here: The 10x Rule: What Raising $1 of Venture Capital Really Means (the 2018 Edition) | SaaStr
• More durable to promote your organization at sure valuations. This may completely be true. Should you increase at, say, a $100m valuation, most traders need not less than a 3x return. Meaning they might veto an acquisition of < $300m. Against this, in case your final spherical was merely at $10m put up, virtually any acquisition could meet the essential check for approval out of your traders. And you’ll almost definitely want their approval to promote. Extra right here: Does raising funding from VCs limit your exit? | SaaStr
• Burn charges can creep up, generally to an virtually out-of-control degree, with out even totally realizing it.  Founders are continually shocked how a lot burn charges creep up after a giant spherical.  Of us simply get bored with being extra scrappy, and wish extra hires and stories.  Salaries go up.  Add all of it collectively, and your burn fee can rapidly double or extra simply months after you increase a giant spherical.
• Mediocre outcomes even in pretty high-priced M&A.  Should you increase at $1B and are in a position to get your traders to promote for $1B, few of us find yourself completely satisfied.   Late-hired workers usually make near nothing.  Later-stage traders are sad.  And sometimes solely the present administration makes any actual cash.  Even at a nominally very excessive worth within the acquisition.  There simply isn’t sufficient to go round in the event you don’t promote at not less than 3x the value of the final spherical.

So sure, a excessive valuation does slim your choices going ahead.  However completed proper — which is difficult — a excessive valuation generally may also broaden some choices (more cash and/or extra alternatives to pursue).

It’s not at all times clear which is best. A excessive valuation is betting the nice instances proceed eternally. A low valuation provides you extra flexibility. Make the proper guess on the proper time, with as a lot data as you could have.

A associated put up here.