Innovations & Inspirations

I met with a friend, the CEO of a very cool Internet startup in San Francisco who had just closed his Series B. In the current “bubble” of Internet company valuations, I was surprised at the valuation of his growing, hot, revenue generating company.  As someone who generally thinks prices are too high in today’s Internet deals, his wasn’t as high as I thought it should and could have been.

As a comparison, a new competitor in the same space just closed their Series A.  This competitor is doing less than 1/10 the revenue of this CEO’s company, doesn’t have as developed of a product, yet raised their Series A at the exact same price as the Series B of the first company.

So what happened?  Was the competitor’s price too high?  Almost definitely.  Why?  Apparently, they had one of the best pitches most investors have ever seen and had created an amazing hype around the business, engaging two top VCs in a bidding war.  But was the CEO’s company undervalued? Almost definitely too.

It turns out that this CEO had gone out to raise the follow on financing too late.  He was presenting to firms only six weeks before his company was going to run out of cash.  In fact, the price would have been even lower if another VC had not come in and bid up the price to the current level.  Generally, with the exception of the stories of VCs not letting CEOs leave pitches without taking a check, it takes VCs at a minimum at least 3 weeks from beginning to money in the bank.  And that’s assuming the company is perfect, the valuation is spot on, and nothing goes wrong.

The lesson: it may seem obvious, but seems to be forgotten when CEOs are heads down trying to run their companies.  CEOs generally want to start fundraising as late as possible so they can show as much progress as possible, which should value the company higher.  But sometimes they start too late.  CEOs of young companies should be sure to start fundraising at least 3 months before money is going to expire, with a target of closing at least 1.5 months before, or else risk getting hit on valuation to save the company.