Chris Dixon usually hits the point on the head, but in this case, I think he might have missed it a little. He writes:
I recently had a number of conversations with CEOs of later-stage startups (generating significant revenue) that went something like this. They want to raise more money, and VCs are offering them money at a high valuation. The CEO is worried that taking money at that valuation will “set the bar too high” and make it difficult to sell the company – if the time comes when he/she thinks it makes sense to sell – at a price that isn’t a significant multiple of that valuation.
These CEOs are worrying too much. VCs know what they are doing and almost always invest with a financial instrument – preferred shares – that protects them even when the valuation is very high.
The article addresses the point of how VCs are protected by various valuation mechanisms very well. What it doesn't address is what is presumably the main concern of CEOs/founders, which is not the VCs velvet-lined pocketbook, but their own returns.
Taking Chris's example of Dropbox, before they took investment at a $4b valuation, Dropbox's founders/early employees, with the Series A round being just $6m (probable valuation roundabout $30m), would have gotten quite rich from an exit at even at the unambitious level (for Dropbox) of $100m.
After the next round, of $250m at $4b valuation, if something goes horribly wrong and Dropbox exits at $300m, its founders will make pretty much nothing. In fact, anywhere in the range of $250m to $4b, investors will presumably have protected themselves in the ways that Chris describes, and so the return to the founders will be severely reduced. Dropbox's "bar" for a great return to founders is now above $4b - quite a long way from $100m.
When CEOs say it "sets the bar too high", they're probably talking about their own returns.
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