It’s harder for startups to raise money now than it was two years ago. As a result, startups that are still figuring out their business models are either unable to raise money, or they’re forced to raise “down rounds.”
In short, a down round occurs when investors think your company is worth less than the last time you raised money.
Brad Horowitz, partner of venture capital firm Andreessen Horowitz and board member of startups such as Lytro and Foursquare, has some advice for founders who are attempting to raise money right now.
He says markets are emotional, not logical, which is why they fluctuate. In today’s down investing climate, he likens founders who are struggling to raise capital to the captain of the Titanic. They’ve hit an iceberg, and now they need to make sure the lifeboats are ready, Horowitz says in a column on Fortune.
Raising a down round isn’t the end of the world, says Horowitz. If you’re burning through investors’ money and don’t yet generate revenue, there’s no choice but to raise at a lower valuation. “You need to figure out how to stop the bleeding, as it is too late to prevent it from starting,” Horowitz writes. “Eating shit is horrible, but is far better than suicide.”
Down rounds can create issues founders need to deal with if they want to right their sinking ships. Employee moral often takes a toll. “If you raise money at a lower price, your people will likely not only freak out, but possibly believe they were lied to,” Horowitz writes. Founders need to explain the situation truthfully to employees and instill confidence.
Horowitz suggests saying something such as, “Yes, we did a down round. Yes, that kind of sucks. But no, it’s not the end of the world.”
He ends with a final reminder to startups that cash is king. If you don’t make money, you’ll need to pray for an acquisition.
“If you generate cash, investors mean nothing. If you do not, then your success will depend upon the kindness of strangers.”
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