We must de-stigmatize the rounds in 2023

Holden Spaht Contributor

Holden Spaht is a managing partner at private equity firm Thoma Bravo.

A new year is upon us, and with it uncertain and uncomfortable market conditions. These conditions are accompanied by equally uncomfortable decisions. For startup founders, determining which path is best for their business may require fundamentally rethinking how they measure success.

The business climate in 2023 will be unfamiliar to many who have started a business in the last decade. Until now, a seemingly endless stream of relatively cheap capital has been available to any startup seen by the VC world as having high growth potential. Everyone wanted a piece of the “next Facebook”. With interest rates close to zero, the risks were relatively low and the potential rewards astronomical.

Burning money to pursue growth has become the norm; you just collect more money when you run out. Debt? Who needs it! Existing investors were happy to play along, even if their stake in the company was somewhat diluted: rising valuations sated everyone.

Over the years, this pattern of rapidly rising valuations and a pie that grows fast enough to offset any dilution - fueled by the "free money" that made almost all investments justifiable - has crystallized into a mythology at the heart of startup culture. It was a culture that almost everyone, from founders to investors to the media, fed on.

Rising valuations grabbed headlines, sending a signal to both potential employees and markets that a company had momentum. High valuations quickly became one of the first things new investors turned to when it was time to raise additional capital, whether through a private funding round or an IPO. purse.

The funding route you take has huge implications for the future of your business; it should not be clouded by ego or driven by media appetite.

But tough economic conditions tend to dispel complacency about harsh realities, and we'll see reality check out when it comes to funding this year. In an environment of rising interest rates and a generally negative macroeconomic outlook, the tap will run slowly, if at all. Equity financing is no longer cheap and plentiful, and when drought hits, a sense of anxiety grips founders. They can no longer burn cash without giving serious thought to where they will get more when it is gone.

When the time comes, founders will be faced with a choice that could make or break their business. Are they looking to alternatives like convertible bonds, or are they approaching new investors for more equity financing? Tech stocks have been pummeled over the past year, which could mean their company's value has taken a hit since they last raised capital, leaving them with the prospect of the dreaded 'fall. ".

It's easy to see why down rounds seem out of the question for many startup founders. For starters, they would face the downside of positive media madness, which risks eroding employee morale and investor confidence. In a culture where rising valuations are worn as a badge of honor, founders may fear that a drop will make them pariahs of Silicon Valley.

The truth is, there is no one-size-fits-all solution. The funding route you take has huge implications for the future of your business. So it shouldn't be clouded by ego or driven by media appetite.