Planning multiple rounds of finance during the downturn – give yourself time

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).

  • One aspect that I never see discussed is where a percentage of the funding is earmarked for strategic aquisition of smaller projects with core technology (why re-invent the wheel) and strong developers. In such a case the funding might well be traunched and funding released based upon milestones or circumstances. I spent a lot of time in the games industry and traunched payments based on milestones were common place.
    Within my current business plans I have a number of features/technologies that are desirable but not required that could potentially be fulfilled with much lower development risk by either licensing or acquisition, though acquisition is the preferable route.

    In some ways just thinking about this reminds me of an old schoolboy joke

    “Can you lend me $2M, but only give me $1M now – thus I owe you $1M and you owe me $1M so we are quits”

    Ultimately the features could be attributed to “feature creep” solving problems with which I have been plagued for 2 years, though they now form an intrinsic part of the value proposition.

    Is there a huge difference between $1M, and $1M + $1M traunched for acquisition purposes when considering valuations? It certainly doesn't seem the same from my limited experience as asking for a clean $2M, with the added value of IP / goodwill from any purchase.

    Maybe food for another post.

  • One aspect that I never see discussed is where a percentage of the funding is earmarked for strategic aquisition of smaller projects with core technology (why re-invent the wheel) and strong developers. In such a case the funding might well be traunched and funding released based upon milestones or circumstances. I spent a lot of time in the games industry and traunched payments based on milestones were common place.
    Within my current business plans I have a number of features/technologies that are desirable but not required that could potentially be fulfilled with much lower development risk by either licensing or acquisition, though acquisition is the preferable route.

    In some ways just thinking about this reminds me of an old schoolboy joke

    “Can you lend me $2M, but only give me $1M now – thus I owe you $1M and you owe me $1M so we are quits”

    Ultimately the features could be attributed to “feature creep” solving problems with which I have been plagued for 2 years, though they now form an intrinsic part of the value proposition.

    Is there a huge difference between $1M, and $1M + $1M traunched for acquisition purposes when considering valuations? It certainly doesn't seem the same from my limited experience as asking for a clean $2M, with the added value of IP / goodwill from any purchase.

    Maybe food for another post.