The Last Round Extension Goal



Last week I was talking to an entrepreneur that was out raising money. As they had raised their Series A in the middle of 2021, made good but not great progress, and spent all their capital, they were in a tough spot. When I asked how much they were looking to raise, and at what valuation, I received the expected answer: we’re raising X as an extension of our A round at the same valuation. 

Entrepreneurs that raised rounds at 20, 30, 50, or even 100x revenues have a challenge on their hands. The public market multiples for cloud companies have gone down 40 – 80% this year. Companies that were previously trading for 20x run rate, with strong metrics, are now routinely trading for 6x run rate. Public market multiples have a serious influence on private market multiples.

Why the push for an extension of the Series A round at the same valuation? Simple, to avoid a down round and provide an easy path forward. When a startup raises money at a valuation less than the last round, anti-dilution measures kick in. Say investors put in $10M in the last round at a $100M post-money valuation and own 10% of the company. If the new round is at a $50M post-money valuation, those previous investors that owned 10% of the company for $10M now own 20% of the company ($10M is 20% of the new $50M valuation) and didn’t put any additional capital in the business (assuming basic (Read more...)