Sometimes, I’ll put good money after bad. Not this time.Recently, I’ve seen some proposed down rounds on some investments I made a couple of years ago. I was offered the “opportunity” in invest more at a lower valuation. Sometimes a down round makes a ton of sense. For one particular investment, I am opting to write it off. Here are 7 reasons to just say “No!” to a down round.
- Team: The leadership has grossly failed to execute and no changes have been made after repeated missed product deadlines. At seed stage, we’re betting on the jockey(s), aka the team. Why would I continue to bet on a team that hasn’t done the job?
- Governance: The Board exists to protect all shareholders, not just a select group. At a Seed Stage a board is highly engaged in the business, not just quarterly meetings.
- Market: The market has moved. The valuation comps have all move downwards during this period. That’s the wrong direction.
- Technology: There are new and better technologies on the market. This startup has been lapped.
- Culture: The company doesn’t have a bad culture. They have no culture at all. Culture is the most scalable attribute of a startup, if done right.
- PTP: There is no Path to Profitability. Nor is “profitability” in the vocabulary of the team. Building fast-scaling startups is a lot of work and can be a lot of fun, but at some point, you have to make money. Ask Yik Yak.
- Expectations: Every shareholder letter contained “rainbows and butterflies”. Then all of a sudden, “Houston..we have a problem”. Investors are not adversaries. Investors are partners, and the management team is using our money. Tell me the truth.
This short list should help investors when it’s double-down decision time, and it should help entrepreneurs learn, change, and set proper expectations.