VC on how to “survive and thrive” after a round of losses

Founders hope their startups will continually raise larger rounds of funding at rising valuations. However, unexpected challenges, comparable to a global health crisis or a sudden increase in rates of interest, could have a significant impact on a company’s ability to maintain its valuations.

Some of these startups could have to resort to seed rounds, which is recent financing at a lower valuation than the corporate’s previous price. While founders and investors generally try to avoid inheritances, contrary to popular belief, these deals don’t necessarily have a devastating impact on a startup’s future.

“Our first investment when we founded the company in 2021 was to take stock of the company, which had to make a complete change during the pandemic,” said Nikhil Basu Trivedi, co-founder of Footwork, on the TechCrunch Disrupt 2024 stage. “Their initial business was in the university housing market, which was decimated when the pandemic hit.”

Footwork reset the corporate’s cap table and created a recent pool of stock options for the whole team, Basu Trivedi said, adding that the corporate’s recent business, a restaurant subscription platform called Table22, “managed to survive and thrive because of this experience.” Last week, Table22 announced Series A for $11 million led by Lightspeed Venture Partners.

Although definitely not all corporations which have to undergo a round of declines make a full recovery. Elliott Robinson, a partner at Bessemer Venture Partners, said on stage that if a company is struggling, “there’s a pretty good chance that someone else in your space or a competitor is struggling with a lot of the same challenges.”

Robinson encouraged startups in these positions to stay the course. “If you lose a defensive round, there’s nothing wrong with that,” he said. “In a difficult market environment, this might actually be a victory. You may not see or feel it until the fourth quarter or six, but most of the time the market can open up to you if you happen to’re willing to hang in there.

Notable corporations which have seen valuation hits include Ramp, which was valued at $5.8 billion last yr, a 28% reduction from its previous price of $8.1 billion. The fintech gained some of its value in April this yr when Khosla Ventures valued it at $7.65 billion.

Down rounds weren’t quite common throughout the pandemic boom, but their incidence as a percentage of total deals has greater than doubled from 7.6% in 2021 to 15.7% according to PitchBook data in the primary half of 2024.

Startup prices dropped significantly after the US Fed raised rates of interest, and many corporations’ valuations remain inflated relative to their performance, said Dayna Grayson, co-founder of Construct Capital. Some of these corporations are likely considering probate rounds, but many founders find such deals very stressful.

In the probate round, employees and founders receive a smaller percentage of ownership of the corporate.

“I think the scariest thing for a lot of founders is managing morale,” Grayson said. “But you can absolutely motivate people through down rounds.”

Robinson, who has guided three portfolio corporations through periods of decline and decline over the past yr and a half, explained how investors motivated employees and executives at one of those corporations to stay engaged after a round of declines. He explained that while everyone at the corporate experienced a valuation loss, investors created a bonus pool to reward the whole team with money bonuses in the event that they managed to achieve a 60% revenue increase inside a certain time-frame. Robinson said founders and top executives can even receive additional capital in the shape of stock options in the event that they meet certain revenue goals.

“This allowed us to make the company-wide goals and management goals very clear,” he said, adding that it “reminded people that the core business is still solid.”

Many enterprise capitalists are currently wondering what is going to occur when multiple AI corporations raise capital at high valuations.

“I think it would be hard to argue that there aren’t overly inflated valuations in the market right now,” Grayson said.

Basu Trivedi, who has invested in several AI startups including AI detector GPTZero, said many AI corporations “have the fundamentals to justify the hype and valuations,” but later added that it’s still hard to say. which artificial intelligence corporations will succeed. “Some of these categories are very competitive,” he said. “There are about 20 companies that do something really similar.”