100% true. The other challenge though is wiping out employee equity. The prob of a sizable liquidity event, and meaningful returns to employees in the best of times is very low (your previous article). Because of the frothy fundraising env in 2021 and before, I suspect that the down-rounds will be sizable (60%+ on last valuation) and hence the expected value of employee equity is ~0
And yet this contradicts with the pressure to maximise returns for your earlier stage investors who are seeking higher valuations. How does one strike this balance or convince otherwise :(
In my opinion the problem is that everyone and their grandma used to get funding for every silly idea they had. Then came 2021, and the talks of recession. Valuations are down, and it became much more difficult to raise funds.
Companies that have a great product and invest to improve it shouldn't have a problem taking a down round. Valuations are just estimations. Economic downturn will pass. Their great product and processes will guide them to even bigger heights afterwards.
100% true. The other challenge though is wiping out employee equity. The prob of a sizable liquidity event, and meaningful returns to employees in the best of times is very low (your previous article). Because of the frothy fundraising env in 2021 and before, I suspect that the down-rounds will be sizable (60%+ on last valuation) and hence the expected value of employee equity is ~0
Good read for investors who should be watching how companies respond to the large drops in valuations from 2021.
And yet this contradicts with the pressure to maximise returns for your earlier stage investors who are seeking higher valuations. How does one strike this balance or convince otherwise :(
In my opinion the problem is that everyone and their grandma used to get funding for every silly idea they had. Then came 2021, and the talks of recession. Valuations are down, and it became much more difficult to raise funds.
Companies that have a great product and invest to improve it shouldn't have a problem taking a down round. Valuations are just estimations. Economic downturn will pass. Their great product and processes will guide them to even bigger heights afterwards.