<story><title>Paul Graham&apos;s Letter to YC Companies</title><text>Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle.&lt;p&gt;What does this mean for you? If it means new startups raise their first money on worse terms than they would have a few months ago, that&apos;s not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face &quot;down rounds,&quot; which can be damaging.&lt;p&gt;What to do?&lt;p&gt;If you haven&apos;t raised money yet, lower your expectations for fundraising. How much should you lower them? We don&apos;t know yet how hard it will be to raise money or what will happen to valuations for those who do. Which means it&apos;s more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price.&lt;p&gt;If you raised money on a convertible note with a high cap, you may be about to get an illustration of the difference between a valuation cap on a note and an actual valuation. I.e. when you do raise an equity round, the valuation may be below the cap. I don&apos;t think this is a problem, except for the possibility that your previous high cap will cause the round to seem to potential investors like a down one. If that&apos;s a problem, the solution is not to emphasize that number in conversations with potential investors in an equity round.&lt;p&gt;If you raised money in an equity round at a high valuation, you may find that if you need money you can only get it at a lower one. Which is bad, because &quot;down rounds&quot; not only dilute you horribly, but make you seem and perhaps even feel like damaged goods.&lt;p&gt;The best solution is not to need money. The less you need investor money, (a) the more investors like you, in all markets, and (b) the less you&apos;re harmed by bad markets.&lt;p&gt;I often tell startups after raising money that they should act as if it&apos;s the last they&apos;re ever going to get. In the past that has been a useful heuristic, because doing that is the best way to ensure it&apos;s easy to raise more. But if the funding market tanks, it&apos;s going to be more than a heuristic.&lt;p&gt;The startups that really get hosed are going to be the ones that have easy money built into the structure of their company: the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability. That kind of startup gets destroyed when markets tighten up. So don&apos;t be that startup. If you&apos;ve raised a lot, don&apos;t spend it; not merely for the obvious reason that you&apos;ll run out faster, but because it will turn you into the wrong sort of company to thrive in bad times.&lt;p&gt;--pg</text></story><parent_chain><item><author>pg</author><text>Note incidentally that I&apos;m talking about the performance of the IPO, not the performance of Facebook itself.  I think Facebook as a company is in a strong position.  The problem is simply that Mr. Market (&lt;a href=&quot;http://en.wikipedia.org/wiki/The_Intelligent_Investor&quot; rel=&quot;nofollow&quot;&gt;http://en.wikipedia.org/wiki/The_Intelligent_Investor&lt;/a&gt;) doesn&apos;t think so at the moment.</text></item></parent_chain><comment><author>rst</author><text>Or perhaps Mr. Market thinks it&apos;s a solid, say, $25 or $35 billion company that was just way overvalued at the IPO valuation of $100 billion plus.  There&apos;s certainly a whole lot of commentary along those lines in the financial press, like this example from a few days before the IPO: &lt;a href=&quot;http://marketday.msnbc.msn.com/_news/2012/05/15/11702548-is-facebook-worth-the-price-analysts-split?lite&quot; rel=&quot;nofollow&quot;&gt;http://marketday.msnbc.msn.com/_news/2012/05/15/11702548-is-...&lt;/a&gt;&lt;p&gt;That&apos;s certainly a defensible position:  the company is stable and profitable as is, but the current valuation has a &lt;i&gt;lot&lt;/i&gt; of growth priced in, which could only be realized by growing revenue per user substantially, and they haven&apos;t yet demonstrated how they&apos;re going to do that.</text></comment>
<story><title>Paul Graham&apos;s Letter to YC Companies</title><text>Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle.&lt;p&gt;What does this mean for you? If it means new startups raise their first money on worse terms than they would have a few months ago, that&apos;s not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face &quot;down rounds,&quot; which can be damaging.&lt;p&gt;What to do?&lt;p&gt;If you haven&apos;t raised money yet, lower your expectations for fundraising. How much should you lower them? We don&apos;t know yet how hard it will be to raise money or what will happen to valuations for those who do. Which means it&apos;s more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price.&lt;p&gt;If you raised money on a convertible note with a high cap, you may be about to get an illustration of the difference between a valuation cap on a note and an actual valuation. I.e. when you do raise an equity round, the valuation may be below the cap. I don&apos;t think this is a problem, except for the possibility that your previous high cap will cause the round to seem to potential investors like a down one. If that&apos;s a problem, the solution is not to emphasize that number in conversations with potential investors in an equity round.&lt;p&gt;If you raised money in an equity round at a high valuation, you may find that if you need money you can only get it at a lower one. Which is bad, because &quot;down rounds&quot; not only dilute you horribly, but make you seem and perhaps even feel like damaged goods.&lt;p&gt;The best solution is not to need money. The less you need investor money, (a) the more investors like you, in all markets, and (b) the less you&apos;re harmed by bad markets.&lt;p&gt;I often tell startups after raising money that they should act as if it&apos;s the last they&apos;re ever going to get. In the past that has been a useful heuristic, because doing that is the best way to ensure it&apos;s easy to raise more. But if the funding market tanks, it&apos;s going to be more than a heuristic.&lt;p&gt;The startups that really get hosed are going to be the ones that have easy money built into the structure of their company: the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability. That kind of startup gets destroyed when markets tighten up. So don&apos;t be that startup. If you&apos;ve raised a lot, don&apos;t spend it; not merely for the obvious reason that you&apos;ll run out faster, but because it will turn you into the wrong sort of company to thrive in bad times.&lt;p&gt;--pg</text></story><parent_chain><item><author>pg</author><text>Note incidentally that I&apos;m talking about the performance of the IPO, not the performance of Facebook itself.  I think Facebook as a company is in a strong position.  The problem is simply that Mr. Market (&lt;a href=&quot;http://en.wikipedia.org/wiki/The_Intelligent_Investor&quot; rel=&quot;nofollow&quot;&gt;http://en.wikipedia.org/wiki/The_Intelligent_Investor&lt;/a&gt;) doesn&apos;t think so at the moment.</text></item></parent_chain><comment><author>Alex3917</author><text>Out of curiosity, why is it that Facebook&apos;s IPO would hurt early stage valuations, when all of Facebook&apos;s early investors made hundreds of millions or billions of dollars? I could see it getting harder to IPO at a good valuation for a few years, but that shouldn&apos;t drive down early stage  valuations all that much. Also, to me the most interesting thing to watch (beyond Spain) is these new crowdsourcing laws going into effect January 1st. That has the potential to drive hundreds of millions of dollars into the angel space overnight, sending valuations through the roof or at least keeping them propped up for a while.</text></comment>