{"id":643334,"date":"2024-11-04T17:00:00","date_gmt":"2024-11-04T14:00:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/no-startups-shouldnt-always-take-the-highest-valuation-seed-vcs-say\/"},"modified":"2024-11-04T17:00:00","modified_gmt":"2024-11-04T14:00:00","slug":"no-startups-shouldnt-always-take-the-highest-valuation-seed-vcs-say","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/no-startups-shouldnt-always-take-the-highest-valuation-seed-vcs-say\/","title":{"rendered":"#No, startups shouldn\u2019t always take the highest valuation, seed VCs say"},"content":{"rendered":"
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One of the lessons that the wild Silicon Valley venture funding environment of the past few years has clearly taught is this: Bigger valuations are not always better.<\/p>\n

\u201cI think we\u2019ve all kind of seen the negative impact of having a valuation too high from the last, call it, three years,\u201d Elizabeth Yin, co-founder of Hustle Fund\u00a0said onstage at TechCrunch Disrupt last week. When a VC bull market hits and startups are able to easily raise a lot of money before they have real, provable businesses, they\u2019ve set themselves up for difficult times.<\/p>\n

Because \u201cthe bar is higher for that next round,\u201d she said. The general<\/a> rule is for each early round,\u00a0business growth should justify double, or possibly trip<\/a>le, the previous valuation, Yin said.\u00a0\u00a0<\/p>\n

So early valuations \u201cshouldn\u2019t be anything really crazy that you don\u2019t think you can grow into realistically with your traction, because it always catches up with you,\u201d she said.<\/p>\n

If the company fails to grow into a lofty valuation, it could wind up burning its most valuable employees, said VC Renata Quintini, co-founder of Renegade Partners. <\/p>\n

Most startups grant stock to employees, or sometimes grant stock options \u2014 which the employee is required to buy. And most startups offer that stock as a significant portion of their employees\u2019 salaries. People join startups because they believe if they help build the company, their stock will pay off. So, obviously, it is not good if employees\u2019 stock grows less valuable over time.<\/p>\n

\u201cIf that gap doesn\u2019t close, you\u2019re actually disincentivizing the people that joined you early on,\u201d Quintini warns.<\/p>\n

A much better way to raise money is to \u201ccreate a tight process,\u201d\u00a0by setting reasonable valuation expectations from the get-go, VC Corinne Riley, partner at Greylock, said onstage. \u201cYou don\u2019t want to be dillydallying and have a multi-month round. You\u2019re wasting your own time. You\u2019re wasting the VC time,\u201d she said. \u201cYou want to know exactly how much you want to raise.\u201d\u00a0<\/p>\n

Quintini advises founders to have ranges in mind for both an amount and a valuation. To do that, she says, a founder should spend more time in an information-gathering phase than in an actual pitching phase.<\/p>\n

They should ask VCs in their network their opinions on their valuation. They should know what type of market they are in and what the multiples on revenue or other pricing metrics are in vogue for their area at the moment. They should carefully consider how much dilution they are willing to take \u2014 that is, how much of their company they are willing to sell off and how much of a stake they will retain after the round.<\/p>\n

Should the founder want to sell a smaller stake \u2014 10% versus the more typical 20% \u2014 the founder should find out which firms would even entertain that idea. Many firms won\u2019t bother with small stakes, as that decreases their chances for a big return.\u00a0<\/p>\n

Coming into the pitch meeting wanting too much for too little means \u201cyou better have a fantastic business and be an outlier company to back it up; otherwise, you\u2019re actually going to be turning VCs off,\u201d Quintini says.<\/p>\n

\"Renata
Renata Quintini, Corinne Riley, Elizabeth Yin (left to right). <\/span>Image Credits:<\/strong>Barak Shrama\/ Slava Blazer Photography \/ Flickr (opens in a new window)<\/span><\/a><\/span><\/figcaption><\/figure>\n

If a VC comes in with a term sheet that wildly beats all the others in valuation, founders should look at the fine print. Has the VC banked the term sheet toward giving its firm outsized power? This could also mean that the company won\u2019t be able to convince other VCs to invest in later rounds.<\/p>\n

Startup accelerator Y Combinator distributes<\/a> a sample term sheet that shows off what most VCs consider standard terms. These cover everything from voting rights to board seats.<\/p>\n

\u201cI\u2019ve definitely seen a number of my founders, especially international companies, get all kinds of term sheets with all kinds of terms that I would consider nonstandard,\u201d Yin described, such as \u201cweird board configurations\u201d like the VC wanting multiple board seats, or \u201call kinds of liquidation\u201d preferences. Anything above a \u201c1x\u201d liquidation preference means that the investor gets paid out more money, and first, should the company sell and isn\u2019t standard.<\/p>\n

In addition to being prepared to negotiate on dollar amount, valuation, and stake size, founders should be prepared to\u00a0negotiate board composition and items like who gets to choose the independent board members.\u00a0Whatever you decide on the terms that give VCs power could impact your company, and its future valuations, forever.<\/p>\n

\u201cI encourage our founders to turn the very nonstandard things down. And then there are some others that are borderline. And maybe you take it because you don\u2019t have any other options, but, once it\u2019s done, it\u2019s really hard to unwind,\u201d Yin says.<\/p>\n<\/div>\n

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Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

One of the lessons that the wild Silicon Valley venture funding environment of the past few years has clearly taught is this: Bigger valuations are not always better. \u201cI think we\u2019ve all kind of seen the negative impact of having a valuation too high from the last, call it, three years,\u201d Elizabeth Yin, co-founder of…<\/p>\n","protected":false},"author":1,"featured_media":643335,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/techcrunch.com\/wp-content\/uploads\/2024\/11\/Corinne-Riley-Elizabeth-Yin-e1730490665508.jpg?resize=1200,1200","fifu_image_alt":"","footnotes":""},"categories":[18],"tags":[152575,152580,152581,152582,70917,151520],"class_list":["post-643334","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-technology","tag-fundraising-trends","tag-greylock-partners","tag-hustle-fund","tag-renegade-partners","tag-startups","tag-techcrunch-disrupt-2024"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/643334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=643334"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/643334\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/643335"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=643334"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=643334"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=643334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}