What are you seeing? People seem to be asking each other this question with increasing frequency. I attended a board meeting for a client who will need to be doing a financing in the next few months, and that was the one question everyone wanted to have the answer to. There is no good answer to this question because no one is seeing anything. We all have random data points. So, here is my answer:
Prepare to be horrified. Funded companies that are doing well and controlling their burn, are getting appalling down valuations from potential new investors. These valuations are often below the original “A” round valuation. Imagine meeting your milestones, controlling your burn and going from $80 million to $10 million on valuation. This is if you are lucky enough to get an offer of investment. Most of what I am seeing is people doing a bunch of diligence and then declining politely.
One reaction is to say that there are bottom fishers out there trying to take advantage of general economic situation, and there may be some truth to that. But, I think the real situation is that there really isn’t any visibility on the economy hence the risk associated with any valuation is way high. For example, I am told by my investment banker friends (none of whom have anything better to do than wring their hands over the economy), that the “normal” rebound from a market bottom is about a 25% to 30% increase in stock prices from the bottom. Well, the Dow is already down about 50% (maybe a little more) from its high. So, if this is the bottom, we can expect to get half way back to where we were last year at the high. What does this say about valuations? The only safe bet is one that is so low you can’t go wrong no matter what happens, hence valuations that wipe out entrepreneurs.
Series “A” money is really hard to find. It is not that no deals are being done; it is that very few deals are being done. For a while the anecdotal evidence seemed to be that VCs would invest in Series A deals on the theory that we would be through the recession before the company had to enter the market with a product or raise more money. But, now the anecdotal evidence seems to run another way. No one is sure when the recession will end, and, as just noted, trying to raise follow on rounds in this climate can be very painful.
Angels are also hard to find, and they have the additional problem that it is often hard to get 18 months or more of financing from angels.
All of this leads me back to the conclusion expressed in my last post. If you can avoid having to spend time getting financing in this environment, you should. It may mean that you are delayed in getting to market, that you are taking competitive risks that you would rather avoid or that you put off your new venture for some time, but by spending a ton of time to raise money at a very depressed valuation, you may be condemning yourself to a poor return, even if the good times come back big and strong.
Where is the good news? One of our partners has a theory that could be best described as “the darkest hour is just before dawn.” His theory is that when there is no visibility and all the news is bad and there does not even appear to be a faint glimmer of hope, that is when you have reached the bottom.
So, here is my question: Is it dark and gloomy enough so we can start feeling optimistic?
