Venture capital has been so flush start-ups still have plenty of cash, but it won’t last and it’s time for Silicon Valley founders to get a reality check.
The financing options aren't great. Investors will be seeking much better terms across fewer deals. Softbank CEO Masayoshi Son, synonymous with the era of big bets on start-ups pushing them to unicorn valuations, said last week it may reduce investments by up to 50%.
One way to avoid the down round is for companies to give up more in terms of investor protections built into deals. Competition had been so intense for deals, investors were dropping protective terms, owning larger stakes in companies and more shares to make their investment whole in an eventual exit."If they come back in full force it should help keep valuations high, rather than take a down round which has signal risk to future investors.
Given this environment, more companies will be looking to raise convertible notes once their cash is low rather than pursue primary equity financing to make the best of a bad world when it comes to valuation – avoid a down round if only eking out a slightly higher valuation. While those in the know, know, the convertibles give the appearance that the nominal equity value in the fundraising is going higher.
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