Founders, stop valuation-maxing your venture.
A story on what happens when you optimise for the wrong things
A Brief Introduction
I keep seeing raises happen in the space for things that
a) Don’t need that much money
b) Shouldn’t be priced at what they are
Yet, they keep happening.
Given there’s very little data on raising and getting your crypto venture off the ground I thought I’d write a bit more on this topic. I wrote one piece last year that was well received
and still holds up pretty well.
What your valuation really means
Basically your venture’s valuation is how much investors are willing to pay for it today based on how much they believe it’ll be worth in the future. The probability of whether the venture will be worth more in the future is where the risk lies for the investor but more importantly for whether YOU will actually be able to create enough value to justify that valuation.
Your valuation isn’t a representation of how much you are worth or how your team is worth but rather a function of how much value you have created till date and your confidence in creating that much value in the future. This is probably the most crucial point that everyone forgets.
I’ve written a little story that describes the journey of how this all plays out.
You gather a band of friends ready to create the next big DEX on Solana. You have a bit of a prototype that looks cool and a team that comes from FANG, Stanford, etc etc.
“Great, we’re worth a ton because our team is stacked and we have a prototype” you think to yourself.
You go out to investors and they can’t believe a unicorn like you fell out of the sky. $10m fully diluted the first one says with $1m in cash. They’re a well respected crypto VC, have the right network and think they can accelerate you the most.
You like that number, but you want to see what else is out there. You go to the second one, $25m and $2.5 cash wired within a week flat. “Wow, I can’t believe I was getting ripped off by the first dude. I get an extra $1.5m and a higher valuation. SICK”
You decide to push it a bit further and go to a few more investors. A Saudi crypto fund in Dubai is willing to offer you $5m at $50m. You can’t believe it. You’re elevated. “FIFTY MILLION DOLLARS” you think to yourself. “Our team really is all-star. LFG”.
You decide to go back to all your previous courters and tell them to get in at a $50m valuation or you’re going with your latest courter.
The first switched on Crypto VC you spoke to realises that it isn’t worth it and decides to pass. You don’t care. You have plenty more lined up. The others are a bit reluctant but they FOMO in because they need to deploy $.
You close your raise, throw a party for winning, get congratulated from everyone you know. The press article comes out. You and your team feel on cloud 9. “We’re going to crush it” you think.
Sounds great! What could go wrong? Well, we missed a few more parts to this story…
You go through a huge round of hiring because you need engineers, designers, product managers, marketers and a whole bunch of other roles that are completely useless at the stage you’re at but you’ll still hire because you have the money to do so. Your runway is about 2 years now.
6 months go by, challenges arise, your investors ask you where the product is. You say it’s close but there’s just a few delays along the way. A few more months pass by.
You’re now ready to launch and it’s been 9 months since you did the raise. The team is fleshed out, the press is ready, your token printer is ready to go. BOOM. You launch.
TVL goes up, the team is pumped, your Discord is buzzing with excitement. Hell yeah, it’s happening you think to yourself. All metrics are looking good. You think that its time to expand the team and raise your next round.
As you think this, the market shifts. Your token price goes down. Not a big deal you think, it’ll recover. The market drops further. Your incentives aren’t really that attractive so you put more fuel on the fire to prop up your APYs. That should fix it.
The market tanks further, your team has expanded, your runway has shortened, your token price has also dropped even more. You realise you need more money… and soon.
You speak to your other founder friends and ask them what’s being funded and what level of traction they have. A well established DEX on Avalanche is doing $100m/day in volume, no incentives and is just able to get a $50m valuation after struggling for 3 months. You look at your metrics, you’re only doing $10m/day in volume and are spending excessively in incentives. “Eh, our team is better. We were hot in the market in our first round”.
You start going out and very quickly you realise that nothing is the same anymore. You hustle for 3 months and finally get a valuation locked in: $28m. You already sold 10% for $5m in the first round. Your increased burn means you need at least another $7m. Your token treasury only has 30% of the supply. This raise is going to take 25% leaving you with 5% for future rounds. You run the math, unless the future valuation is north of $250m by the next round that 5% will get you very little.
Months go by and slowly everything starts unravelling around you.
If only you kept your burn down, chosen a reasonable valuation, stayed away from useless incentives and had better investors guiding you — this situation wouldn’t have existed. You are now forced to create over $200m of value otherwise its all over.
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The valuation you raise at is critical to get right since the choice has implications on every single aspect of how your startup works and runs. The higher your valuation, the higher the expectations you set for yourself in the future. You have to assume everything will work exactly as you plan — which it never does.
Building a startup is hard and almost everything will change. Thinking that your assumptions at the start will be right is setting yourself up to fail.
When you take a more conservative valuation and keep your burn down you give yourself time and flexibility to figure things out. The more you max out your valuation the more pressure you create for your future self.
You want to win from creating more value than all market competitors and ideally not needing investor money.
The more money you raise, the more you borrow from the future.
You only have one life, maximise the amount of cool shit you can do — not the number on a paper that creates pressure for your future self.