Archive - September 28, 2016

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The Melting Liquidation Preference

The Melting Liquidation Preference

I’ve been through two severe market declines, both in 2001 and 2009. Public market volatility at the beginning of 2016 gave birth to a lot of “doom and gloom” posts on VC blogs. The public markets have recovered, but the scare earlier this year seems to have resulted in more conservative cash planning within early stage companies. Investors and founders alike are paying closer attention to multiples. It also got VCs like me thinking more about structure.

There is a large wave of companies that raised capital in the last 18-24 months that will ¬†come to market for capital soon or have recently done so. The key obstacle for these companies is that they likely raised capital at a valuation higher than they could retrieve in the markets today. These companies might have made substantial progress in their businesses, thereby reducing the risk, and therefore increasing the valuation….or so the argument goes. The issue, however, is that the price for unit of risk has gone down. In other words, there is a generation of companies that need to accomplish significant traction just to earn their most recent valuation. I’ve heard several people recently proclaim “flat is the new up round.” Read More

Copyright © 2014 Jason Heltzer