Recently caught up with a great founder coming up on $40m ARR, but it had been a slog
They raised a round at $100m valuation years back but weren’t about to raise again
Their #1 competitor raised at $2.1B. And is just a smidge bigger today.
Which would you rather be?
— Jason
Be Kind
So VCs have a lot of “-isms” that simplify a lot of complex things, as many -isms do.
One is how certain startups will just “grow into their valuations”.
It’s a good rationalization when you’ve invested in a good company that just was way, way overvalued at the peak, or for whatever reason, in the last round.
Today, a $20m ARR startup growing 100% that magically raised at $1B in 2021 might fetch only a $200m valuation, for example. A far cry from $1B. But … if the startup’s burn rate is low and it won’t need to raise for years, you can rationalize it. That $20m growing to $40m (pretty impressive) next year, then $70m, then $120m … and boom. They’ve grown into their $1B valuation from 4+ years ago.
And that’s a slow process that’s rolling out all across tech and SaaS now. Every top VC has several of these unicorns and pre-microns in their portfolios that are doing fine, but aren’t worth a fraction of their last round price.
But that doesn’t mean issues don’t lurk, even if you are well funded, and your burn rate isn’t very high, if you are way overvalued and have to grow into your valuation:
* First, your startup is likely structurally unfundable. If you raised at $1B in the last round and are worth $200m today, that’s not a downround. It’s likely a structure that just won’t work. Your existing investors may put in more money, but even if they do, they’ll likely only put in just so much. Ask them.
* Second, acquisitions get tough when you are overvalued. Not impossible, things can be worked out, but tough. If you raised at $1B at the peak and are worth $200 today, you’d have to sell for $2B or more to make everyone truly happy. That could take 5+ more years, best case.
* Third, do everything you can to reset things for your employees. You can’t change everything, but you can do everything from making sure you have the lowest practical 409a valuations, to repricing options in some cases, to granting supplemental, lower basis grants to your top 10%-20%.
This isn’t the end of the world. If you have 10 years of cash in the bank because you raised at a top valuation, make the most of it. Make sure it lasts, and take advantage of the fact you don’t have to ever fundraise again.
Just be aware that “growing into your valuation” isn’t that simple. To create a good exit, you’re likely going to have to grow into 2x-3x that big round price.
In venture we talk a lot about “growing into your valuation” as a calming way to rationalize overpaying
It makes sense
But the real question is how do you grow into 2x-3x your valuation
Below that, the last round investors don’t make money = lots of friction
— Jason
Growing image from here
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Jason Lemkin, Khareem Sudlow
