A few of our portfolio companies raised rounds of financing prior to the world changing in March. They all decided to raise additional funding after the pandemic lockdown to strengthen their balance sheet in these uncertain times. Each of them considered whether to reopen their previous round or open a new round with a higher valuation to reflect progress achieved. If you are considering the same question, below are the thoughts I shared with one of those companies.
I think there are advantages and downsides to both scenarios. Here are a few questions you might want to ask yourself:
What's the value of the progress you've achieved since the previous round? Can you make a strong argument that it's worth a valuation increase of $2 million or more?
How likely are the potential investors to invest at a higher valuation?
How much of your time will be required to convince them to invest at a higher valuation?
Will you have to cover the legal costs of your next round?
How much of your time will be required to drive the negotiation / legal setup?
How will your current investors feel about a flat round? How much time will be required to address their concerns about a flat round?
How much more value could you drive for the company if you focused your time on something other than the terms of this round?
And here is my perspective as an investor:
I think you've achieved significant progress since the last round. I think you could argue a valuation increase of $2 million or more based on the contracts you've secured.
If I were in your shoes, I would confidently explain that to your new investors. I would explain that, in the interest of your current investors and your company, you would like to raise funding at a higher valuation. I would emphasize that it is a critical time for your company. Let them know that you want to close this round as quickly and seamlessly as possible so you can drive more value for your investors.
With that said, I recognize that the world is very different than it was in March. I also recognize that this is a crucial time in your business. If you think you can drive more value for the business in the long term by just doing an extension, I'd support that. Regardless of what you decide, I think you should share your thinking with your current investors, especially the ones who invested in your last round, before you go much further. It will reduce the amount of time you'll spend dealing with their concerns later.
Listen of the Week: Romeo & Juliet in Rwanda: How a Soap Opera Sought to Change a Nation. Ervin Staub, a Jewish psychologist who narrowly escaped the Holocaust, inspired a radio show that convinced people who once slaughtered each other to join hands and make peace.
Portfolio Quick Hit: Sugarwish achieved 5x YOY growth in Q2 as more people sent Sugarwishes to friends, family, employees, and customers in this time of crisis. If you’re looking for a way to send some cheer, check out Sugarwish. You can create custom gifts or invite gift recipients to design their own candy or popcorn gift box.
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