When your last round is really a last stand

Although the fundraising market for startups may be tightening, valuations are still elevated and it’s a good time to raise capital.  Raising a new round of capital is generally a time to pat yourself on the back, but sometimes a new round isn’t a time to celebrate, rather it’s a time to recognize that you’ve really got to perform or this will be the last money you raise (and you’ll either be forced to sell, cut staff, or die).  Here’s when you know it’s the last money in:


-The most obvious sign is that you took a down round or flat round.  Unless there was a big jump in price, it’s a signal that your investor base and the market in general is not really excited about the business.  There are exceptions to this rule, for instance if you’re doing a small inside round to take advantage of an immediate growth opportunity, but generally the rule holds true.


-The amount raised was smaller than your prior rounds because investors aren’t that excited about owning more equity, rather they’re just hoping to maintain the value of their current equity (aka “throwing good money after bad”).    Once again, the exception to this rule is the same as the one highlighted in the first bullet (small inside round to take advantage of growth). 


-Past investors got severely crammed structurally.  A 1.0x senior liquidation preference is perfectly fine for the next round, but if it was 2.0x or if investors added participating preferred where it didn’t exist before, that’s a signal that investors are very worried about protecting the downside. 


-Your new round attracted no new outside capital, and was insiders only.  This rule only applies of course if you actually went out to market.  There are situations where you just want to do a quick inside round to take advantage of a growth opportunity, so speed to close and familiarity with your investors is paramount.  If that’s the case, outstanding.  But if an insider lead your round and you couldn’t get a new outside investor to join after trying, it’s not a good signal.   


Hopefully you’ve surrounded yourself with a board of directors that tells you exactly what your problems are and challenges you when need be.  But in many instances we see boards that are too timid to tell you the truth.  In that case, recognize that any new cash is especially precious and that your most recent round that investors limped into may be the last.

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