When we are asked to invest in the Series A or Series B of a company it is often the case that the plan is to raise a Series B or Series C further down the track. Part of the investment case then becomes an analysis of the chances of raising that next round, at an increased valuation.
Typically the the thought process goes something like this:
- What milestones is the company planning to achieve within the window of the current round?
- Will they be enough to get a significant uptick in valuation from a new investor?
- Will they be achieved before the company needs to get on the road to raise the next round?
If there aren’t good answers to these three questions it becomes difficult to be sure enough that the next round will be an up-round. And if you think the next round might be at a similar valuation the smart thing to do is to wait until then before investing.
The impact of the downturn for most companies is that they need to make the current round last longer if they are going to come through this analysis positively:
- Any commercial milestones are likely to take longer to achieve
- In a world of falling valuations the more significant milestones are required to be sure the next round will be at a higher price
- VCs are taking longer to make investments – so the milestones need to be in place 6-9 months before the cash runs out rather than 3-6 months
The upshot of this is that most companies must either find ways to operate more leanly (difficult) or raise more money (not necessarily easy).